July 2022 What makes Ireland’s residential property tax different
Introduced in 2013, the Local Property Tax (LPT) is a recurring tax on dwellings. Many of its design features are common with other residential property taxes around the world. For example, the tax base is land and buildings, and not simply land as advocated by Henry George and his followers. The liable person is the owner as is common elsewhere, compared to council tax in England where the occupier is liable. In terms of valuation, it is value rather than area-based, using market capital values rather than annual rental values as is the case with commercial rates.
However, that is where the similarities end. Given that property tax regimes worldwide are known for their diversity, it is not surprising that a residential property tax designed from scratch in the 21st century might be highly idiosyncratic, or as the OECD so delicately put it “the Irish case has interesting peculiarities”. In analysing the LPT from a comparative perspective, we identify 7 characteristics that make Ireland’s residential property tax different.
Designed from scratch: For 35 years or so (between 1978 and 2013), Ireland did not have an annual tax on residential properties paid to local government. Put it another way, local public services related to property (such as maintenance of regional and local roads, street cleaning, amenities) were free to residents of local authorities. This made Ireland an outlier, not simply among developed nations but elsewhere as well, as a majority of countries worldwide levy residential property taxes. Property tax reform is common, with the inevitable distributional impacts resulting in winners and losers, but the Irish case was unusual as the authorities had the opportunity to design a residential property tax regime from scratch, adopting international best practices but tailoring it to local circumstances.
Separate to commercial rates, with no other property classes: In many countries there is a single-integrated property tax regime, with different property classes (charged different tax rates) including residential and commercial, but also other classes such as multi-residential, industrial, agricultural/farms, railways, forests, etc. In contrast, there are two separate property taxes in Ireland, a centuries-old tax on commercial and industrial properties (rates) and a 21st-century new tax on residential property (LPT), with no other property classes.
Very low tax rate: The tax rate is very low, by international standards. Originally, the basic rate was 0.18% but this was lowered to 0.1029% in November 2021 when property revaluations took place. Although it is difficult to compare property tax rates across countries (as the base, reliefs, valuation and number of rates may differ), this tax rate is at the lower end and could be considered too low and unsustainable, although the local services it pays for are also very limited. On the other hand, the base is very broad with few exemptions and deferrals. One could say it meets the ‘broad-based, low-rate’ mantra of property taxes, and taxes in general.
Collection by Revenue: The collection of LPT is by central government, vis-à-vis, Revenue rather than by local government. In many other countries, municipalities and cities collect the property tax. The argument in favour of central government is its administrative capacity, economies of scale in collection, and conducted at arm’s length. The argument in favour of local government is the advantage of local information, and the strong incentive to collect a tax assigned to local as opposed to central government.
Self-assessment: In most cases worldwide, property tax assessment is undertaken by a valuation agency. Although there are different types of agencies, valuation is normally carried out by professional assessors. In the case of LPT, valuation is by means of self-assessment, where the liable person is responsible for assessing the value of the property. Although self-assessment is common for income tax (the self-employed, as an example), it is not common for property tax, with only a few countries in the world (some municipalities in Colombia and India, for example) using this approach.
In the Irish case, information is provided by Revenue, in the form of an interactive valuation guide, in addition to other recommended sources such as commercial property sales websites (daft.ie and myhome.ie) and the Residential Property Price Register. The LPT return does not require a specific valuation for each property, but instead, an indicative or average valuation band. Given the lack of a single, up-to-date database or register of properties at the time of design, and the tight timelines involved, self-assessment was considered the most appropriate solution. Revenue accepted the owner’s assessment where the guidance was followed honestly and a reasonable valuation was returned.
Valuation bands: Rather than individual values as is normally the case, Revenue opted for valuation bands, similar in form to the council tax’s banding system in the UK. In the case of the LPT, there are 20 bands, initially €50,000 in width but increased to €87,500 with the 2021 revaluation. The basic rate is applied to the mid-point of the interval, resulting in the relevant charge for each band. Given the difficulty in valuing properties – often described more as an art than a science – banding was chosen to ease the valuation challenge, as it lessened the administrative burden on both taxpayers and Revenue.
Deduction at source: By their nature property taxes are very visible, with taxpayers often aware of their tax liability, unlike other taxes such as income tax or sales tax/VAT. Although this increases transparency, it makes the tax vulnerable to political and popular resistance. In recognition of this, Revenue arranged a number of payment methods, including online payments and instalments. An innovative payment method is deduction at source, where Revenue instructs the employer or pension provider to deduct the LPT liability from salary or occupational pension. Furthermore, in the case of non-compliance, Revenue can apply mandatory deduction at source, to collect the outstanding liability.
Self-assessment, valuation bands and deduction at source are not common characteristics of a property tax, either in theory or in practice. Self-assessment and banding can result in inaccuracies, undervaluations and regressive tax burdens. Returning to the OECD, it remarked that some of the LPT design features were “potentially problematic”. The use of banding and self-assessment can be considered second-best solutions compared with the more optimal, common forms of valuation. A more collection-led rather than valuation-led approach combined with a campaign to educate taxpayers and encourage voluntary compliance – alongside sensible but not draconian sanctions – were strategies chosen by Revenue to ensure a successful outcome. The issue now is whether these features will be retained, as transitional-type measures, or whether they will be transformed into more conventional, long-term features.
June 2022 Vacant property taxes
Ireland is experiencing a housing crisis, with the problem most acute in Dublin. Nationwide, the demand for accommodation exceeds supply. Although new residential property construction has recovered since the 2008/09 Great Recession, the current rate of about 20,000 units per annum is well below the required annual 33,000 newly constructed homes as stated in the Government’s Housing for All plan.
Property prices and rents have increased strongly, and more so since the COVID-19 pandemic. Property prices are up 60% over the seven years since 2015, and up nearly 120% since their trough in early 2013. Nationwide average rents in new tenancies were about €800 per month during 2009-2014, but have increased by over 75% to reach over €1,400 at the end of 2021. In Dublin, average rents in new tenancies are close to €2,000 per month.
One possible solution is a renewed focus on vacant or derelict properties, and especially in our urban centres. Given the massive shortage of housing, and the high level of property prices and rents, it is somewhat surprising to see so many empty or derelict premises in our towns and cities. What role might a tax on vacant properties play in helping to discourage a wasteful use of a scarce resource?
Census 2016 provided some limited data on the scale of the problem. It recorded over 245,000 vacant dwellings, or 12.3% of the housing stock. Of that number, about 62,000 were identified as holiday homes, leaving over 183,000 vacant dwellings. The census enumerators attempted to establish the reasons for vacancy, and this data is available for over 57,000 properties. The most common reasons were for sale, vacant long-term, rental property or owner deceased. Census 2022 promises to produce improved data on vacant properties, and will be used in conjunction with 2021 Local Property Tax data. More recently, the architect Mel Reynolds estimated that there could be up to 137,000 vacant dwellings in the country.
Although difficult to define and measure accurately (with the need for more reliable and up-to-date data, as always), tackling vacant properties is only part of a multi-dimensional approach that can help urban development and address the affordability crisis.
The Oireachtas Joint Committee on Housing, Local Government and Heritage recently launched its report on urban regeneration, with 39 recommendations. One of the recommendations is for the Government to consider a Vacant Homes Tax. In response, the Minister for Housing, Darragh O’Brien, stated his intention to introduce the tax in Budget 2023, and related measures like grants to renovate derelict properties.
As one of us is currently based at the University of Toronto, we decided to investigate the Canadian experience with vacant property taxes, as affordable housing is a big issue here because of rapidly rising property prices and rents, and with Vancouver being the first city in North America to introduce a vacant homes tax.
The City of Vancouver introduced its Empty Homes Tax (EHT) in 2017, with the aim of returning vacant properties to the rental market. Owners must make an annual declaration, and if their property is not being used as a principal residence or is not rented for more than six months of the year, it is subject to the tax, unless an exemption applies (for example, property transfer, death of owner, redevelopment, owner in care). The tax rate was 1% of the assessed taxable value, then increased to 1.25% in 2020, and is 3% since 2021. Net revenues are reinvested into affordable housing initiatives across the city. City officials claim that the tax is working, with vacancy dropping by 26% and properties occupied by tenants growing nearly 20% over the three years. In April 2022, the city council voted unanimously to increase the tax rate to 5% from 2023.
The province of British Columbia applies a Speculation and Vacancy Tax in major urban areas (including the City of Vancouver) at a rate that varies depending on the use of the property, the owner’s residency status and where they earn and report their income. From 2019 the rates are 2% for foreign owners, and 0.5% for Canadian citizens or permanent residents. Exemptions apply, including major renovations and life events but the main one is the owner’s principle residence. Again, provincial officials claim the policy goal of adding more units for sale and rent is being achieved.
In the City of Toronto, the design of the Vacant Home Tax was completed in 2021, introduced in 2022, and first payable in 2023. Its aim is to change the behaviours of homeowners who leave their homes unoccupied, by compelling them to sell or rent to increase the housing supply. Again, a property is considered vacant if it has been unoccupied for more than six months during the previous calendar year, and the unit is not the principal residence of the owner. Similar exemptions apply as elsewhere. Property owners are required to declare the status of their property each year, and if vacant, the rate is 1% of their property’s Current Assessed Value.
Other cities in the province of Ontario, including Ottawa and Hamilton, are following and will soon implement similar vacant home taxes. In addition, in 2022 the Canadian federal government legislated for an annual 1% federal tax on underused or vacant properties (the Underused Housing Tax) owned by non-resident, non-Canadians, and as with all the others is a housing supply measure rather than a revenue generator.
Although they seem to have political and public support, experts remain divided on the impact of these taxes. It is difficult to disentangle their effects from all the other factors affecting property markets. Earlier evidence from elsewhere, including lower numbers of vacant properties than originally estimated and their concentration at the higher end of the market, raises some doubts about the effectiveness of such taxes as a tool to tackle the affordability crisis for younger, low and middle-income earners.
More evidence is needed so that our policymakers are well informed and make the right interventions about one of the defining issues of our time – housing. Given the current state of the property market and housing supply, a vacant property tax seems like a good idea in principle, but as with all good taxes, the devil is in the detail. Design features are important, but so are the administration and enforcement of the tax. We look forward to seeing the details later this year.
May 2022 Local property taxes around the world
Local recurrent taxes on immovable property are common across time and space. As one of the oldest taxes, property taxes predate income tax and most other common taxes. A majority of countries worldwide use property taxes in some form, and do so primarily to fund local government. Indeed, the property tax is a good local tax because it is one of the best ways to fund cities and municipalities.
Although there is considerable variation in the degree to which countries around the world levy property taxes and rely on such taxes to fund local public services, the yield is fairly modest in most countries. Measured as a percentage of GDP, recurrent property taxes range from as low as less than 0.5 percent to as high as over 3 percent. Although the variation is often between developed and developing countries (with the former tending to rely relatively more on property taxes), there is considerable variation within OECD countries (where the average is close to 1 percent), with high levels (in excess of 1.5 percent of GDP) in countries of an Anglo-Saxon tradition such as Australia, Canada, New Zealand, UK and US (but also others such as France and Japan) as against much lower levels (less than 0.5 per cent) in continental European countries such as Austria, Germany, Hungary, Norway, and Switzerland. In other parts of the world, property taxes tend to account for a very small portion of GDP. Evidence indicates that property tax revenues are associated with economic development, and, on average, rise as a country’s level of prosperity rises. In general it is also associated with the level and type of decentralisation but not with the constitutional (federal/unitary) structure of countries. As for Ireland, and recurrent property tax revenues as a percentage of national income, the estimate varies between 0.5 and 1 percent, depending on whether the internationally accepted GDP measure is used, or the more appropriate (and lower) modified GNI.
Recurrent property taxes involve either a single-integrated tax system on residential and non-residential properties, as common in North America, or a separate regime as in the UK. In this instance, the Irish system is similar to the UK. In the past it had a single-integrated rating system for both domestic and business properties but with the abolition of domestic rates in 1978, the property tax on non-residential properties (commercial rates) is distinct from the property tax on residential properties (the Local Property Tax). Either way, these are still annual taxes on real property, and assigned to local government.
One of the stylised facts of property taxes worldwide is the diversity of property tax regimes across and within countries. Although the design pillars of a property tax are the same – base, liability, rate, assessment, valuation, collection and enforcement – the actual choices made by jurisdictions varies enormously. The reasons for this are not just technical or administrative, as the structure of a property tax is as much to do with politics (or political economy) as it is to do with economics. The historical and institutional context are also important.
Returning to the design features, here are the main potential options confronting policymakers when contemplating property tax reform:
Tax base – land and buildings or land only or buildings only
Tax liability – owner or occupier or both
Tax rate – central and/or local; uniform or differentiated; single or graduated
Assessment – area or value; direct or self; central or local
Valuation – capital or rental; individual or banded; indexation and/or revaluation
Collection – central or local; payment options
Enforcement – compliance checks and sanctions
Other characteristics include the treatment of plant and machinery, different property classes, exemptions and deferrals, and the type of agency involved in assessment/valuation.
Although Ireland is no exception in its current tax treatment of real property, the background to its local taxes on non-residential and residential properties is unusual in that the former dates back over four hundred years or so while the latter, at least in its current configuration, is less than ten years in existence. More on this in next month’s blog when we will continue to write from Toronto, Canada where one of us is temporarily based to work on local property taxes!
April 2022 A primer on Ireland’s non-residential property tax
Commercial rates, or rates as they are simply called, are an annual local tax on non-residential properties. Although a property tax, rates can also be viewed as a business tax as they are levied on properties that are used for commercial purposes. Based on rental values, rates are levied on the occupant of the property. If the property is unoccupied, the owner is liable. Unlike other forms of transactions-related property taxes in Ireland, it is a recurring tax, levied on the use rather than the transfer, disposal or inheritance of the property. Moreover, it constitutes a local tax as local government has rate-setting powers. In addition, rates are administered and collected by the local authorities, with rates demands issued early in the calendar year, and due in two payments. It is common for local authorities to facilitate monthly payments and to assist delinquent ratepayers before any legal proceedings are instigated.
As in some other countries, primarily in North America, rates are determined during the budgetary process, whereby operating expenditures are estimated for the forthcoming year, budgeted non-rates (grants and charges) income is subtracted, and the difference is the amount of rates to be levied, with the ratio of rates income to the rates base equal to the annual rate, called the annual rate of valuation (ARV) or in earlier times, the rate in the pound, or as more commonly used in England, the multiplier. Ratepayers’ liability is calculated by multiplying the ARV by the rateable valuation of the property, with the latter the responsibility of the central Valuation Office, which is independent of local authorities and whose role it is to undertake periodic – or, as actually happens, rolling – revaluations of the rates base, subject to the Valuation Act 2001.
As a tax on commercial and industrial properties, rates apply to shops, licensed premises, hotels, offices, industrial estates, factories, warehouses, wind-farms, power stations, etc. The main exemptions are government properties, state-funded health and education facilities, agricultural land and farm buildings, publicly funded museums and theatres, properties used for charitable, religious or community purposes, and certain accommodation outlets (guesthouses and B&Bs). Many of the independent reviews of local government funding over the years have recommended a widening of the rates base, to include some of the list above, either entirely as in the case of state properties (that do nonetheless make a contribution to local government in lieu of rates), or part-rated as in the case of publicly run, third-level institutions or community halls to reflect any commercial activities undertaken on their premises.
For vacant properties, local authorities have the power to grant a rates refund if certain conditions are met. National commercial vacancy rates for 2020 were 13.5 percent, with a range from a low of 10 percent in one local authority area to a high of 19 percent. When adjusting for vacant properties, arrears, write-offs and waivers, collection rates in 2019 (pre Covid-19 times) were 87 percent, ranging from a low of 76 percent in one local authority to a high of almost 98 percent in one of the Dublin local authorities.
It is estimated that there are about 145 thousand ratepayers in the country, with rates accounting for about 30 percent of annual local authority income. The rates share in local authorities with a large rates base – urban centres and city councils – can be as high as 50 percent, whereas in small, rural local authorities it can be as low as 15-20 percent. Aside from differences in the rates base, there are also variations in the ARV across the 31 local authorities, reflecting differences in local circumstances and choices. A good example of these policy differences is in the four Dublin local authorities, with two of these having the lowest ARVs in the country as against the other two which levy some of the highest ARVs nationwide.
One of the drawbacks of commercial rates or a local business tax in general is that it is a tax base that has no electoral franchise, and thus weakens the accountability principle. Moreover, given the high rates share of local authority revenues, there is a concern that business bears a significant burden of the funding required by local authorities. Aside from the Covid-19 pandemic, other challenging issues confronting local government’s reliance on rates are the megatrends of rapid urbanisation, e-commerce/online shopping, and remote working/WFH.
Confronted with these risks, a review of commercial rates is warranted. Indeed, such a review was undertaken in England by HM Treasury in 2020/21. Although business rates in the UK resemble more a central government tax – or even a transfer – rather than a local tax as the rate is determined nationally rather than locally, with revenues not automatically retained in the area from which they are generated but (partly) pooled and then redistributed, nonetheless the findings of the 2021 review are relevant. It reaffirmed “…the importance of rates and their central role in the tax system…” and that “…rates continue to be a vital source of funding for local services that businesses and residents rely on…”, resulting in the government “…not proposing changing the nature of the tax, or the basis of valuation”. The same could apply to Ireland’s non-residential property tax.
March 2022 Local authority finances 2022 edition
The 2022 local authority budgeted income and expenditure data are now available on this website.
A goal of any university is to contribute to place and to wider society. As NUI Galway’s mission is for the public good, this project is aimed at promoting more informed public policy choices and decisions, by making local authority budgets easier for voters and citizens to access and understand.
Aimed at improving the transparency and accountability of local authorities, users of the interactive website can discover the different sources of local council funding, from commercial rates, residential property tax, charges and fees, and central government grants. They can also see the services provided by the 31 local authorities, including, for example, spending on social housing, local and regional roads, fire and library services, and public parks and amenities. Users can view the income and spending of their own local council, or they can compare to other local councils.
Local authorities plan to spend over €6 billion in 2022. To date, this is the largest day-to-day spending by the local government sector in Ireland. During the years of the Covid-19 pandemic, higher levels of council spending have been supported by central government grants, in the form of increased specific-purpose transfers but also compensation payments for loss of income from rates and charges adversely affected by government restrictions. The website allows citizens to see how this six billion euro of taxpayers’ money is spent locally.
At the aggregated level, some of the highlights from the 2022 data are as follows:
- Dublin City Council’s revenue budget exceeds €1.1 billion;
- The smallest budget is €44 million, for Leitrim County Council;
- Expenditure per person varies from €794 for Kildare County Council to €2,038 for Dublin City Council;
- Spending on housing and roads are the two largest local service divisions, with housing supports the single biggest expenditure item;
- Central government grants constitute the largest share of local government funding, at 40 per cent and rising, with the smallest share from the LPT at less than 7 per cent and falling.
For disaggregated budgetary data by local authority income and spending, click on the council spending or council income weblinks and then choose a local authority to find out where your money is spent, and where it comes from. The data are presented in a user-friendly way, and expressed in euros, euros per person or as a share of the local authority budget. Everything from spending on planning and local development to the operation of leisure facilities is listed, and on the income side, revenue from the Local Property Tax (LPT) to fees and charges for local services.
Finally, as in previous years the income and spending figures in the 2022 budgets are expressed in current prices, unadjusted for inflation. This needs to be taken into account when interpreting the 2022 estimates with prices, on average, likely to be substantially higher in 2022 than in previous years when inflation rates were lower.
February 2022 The economic case for local government
Although there are different theoretical strands to the economics of local government, the seminal works are Wallace Oates’ model of fiscal decentralisation, Charles Tiebout’s hypothesis of local choice, and Mancur Olson’s principle of fiscal equivalence, which were all published in a sixteen-year period between 1956 and 1972. We begin, however, with Paul Samuelson’s theory of public expenditure and Richard Musgrave’s theory of public finance.
As Samuelson argued, a society that uses its scare resources to maximise total welfare must have a mix of expenditures on privately and publicly provided goods and services. With respect to private goods and services, the competitive market system and its pricing mechanism allocates society’s scarce resources. In cases of market failure, outcomes can be improved by government intervention. Once it is decided that provision is by the public sector, the next question that arises is the appropriate level of government, whether that is central, regional or local.
Unlike political scientists who emphasise the political or democratic role of local government, economists focus on the economic perspective, namely, in achieving efficiency through local public service delivery. Using Musgrave’s three-pillars or branches of government framework, the main economic functions of government are the allocative, distributive and stabilisation roles. Whereas it is argued that the income redistribution and macroeconomic stabilisation functions are best undertaken by central government, the resource allocation role should primarily be delivered by subnational government, and, in cases where the benefits are localised, by local government. The welfare gains that accrue by moving government closer to its constituencies and ensuring that citizens get what they want is the allocative efficiency case for local government and dominates the economic debate in favour of decentralisation.
Viewed through the lens of local public finance, the argument in favour of local government over national government provision of uniform services is that, given the spatial considerations, local government facilitates, to the extent possible, the matching of public service outputs with local preferences, and in doing so, promotes economic efficiency. Applying the benefit taxation model, it is desirable that those who benefit from local government expenditure should pay for it, and by doing so, maintain the link between taxes paid and benefits rendered. Where benefits do not extend beyond local boundaries, allocative efficiency can be best achieved by providing public services at the lowest level of government possible. This subsidiarity principle where public goods and services are provided by the lowest level of government that can do so efficiently has been espoused by the Roman Catholic Church and is a core principle of the European Union.
So long as there are different preferences for the level and mix of local services and different costs in local public service delivery, there are welfare gains from fiscal decentralisation. Formalised by Wallace Oates in 1972, this fiscal decentralisation theorem presents the economic case for local government.
An earlier and rather different perspective but with many of the same outcomes was made by Tiebout in his 1956 theoretical model of consumer-voter choice. If citizens are faced with areas of different type and level of public services, as consumers they will choose the local area that best reflects their preferences, by “voting with their feet”. In this case, based on assumptions of perfect residential mobility, absence of spillovers and identical preferences within each area, a political solution is not required to provide the optimal level of public goods as the market is said to be efficient.
Not altogether dissimilar but more focused on the design of jurisdictions, Olson’s 1969 principle of fiscal equivalence assigns revenue-generation powers to central and local governments commensurate with expenditure responsibilities and, where possible, aims for a close match between benefit area, tax area, and electoral area, i.e. political boundaries consistent with service areas. When citizens reside in several overlapping jurisdictions (central, regional/state, local/municipalities), they should pay taxes to each level corresponding to the benefits that they receive from each jurisdiction.
Notwithstanding the externalities and economies of scale arguments in favour of a more centralised government, functions should be assigned to the level of government whose jurisdiction most closely approximates the geographical area of benefits provided by the function. This indicates that, for example, national defence, foreign affairs, migration and monetary policy should be provided by central government as the benefits and costs are national in scope. In contrast, fire protection, parks and recreation, planning and zoning, and street maintenance, for example, should be, applying the benefits rule, provided by local governments as these are primarily local affairs.
This completes the theoretical rationale for local government.
January 2022 History of local authority rates in Ireland
Rates are a local tax levied on certain classes of fixed or real property. A centuries-old tax, it predates the foundation of the Irish State in 1922. Although the origin of rates can be dated as far back as Anglo-Norman times (circa 12th century), the basis of the English rating system is the Poor Relief Act of 1601. The tax, or cess as it was called, was levied on both domestic and non-domestic properties.
The basic law covering valuation is the Valuation (Ireland) Act of 1852, which laid down that all immovable property was to be valued for the purposes of rating, i.e. land, buildings, mines, fisheries, canals, railways, etc., but with some exemptions e.g. state properties, places of religious worship, buildings used for charitable purposes. The basis of valuation was called the net annual value. For land, the reference was an average scale of prices laid down in the Act for various farm products (wheat, oats, butter, mutton, and beef, for example) and was to take into account the quality of the land, proximity to the market, etc. For houses and other buildings, assessment was by an estimate of the annual rental or letting value that could reasonably be expected, over and above the cost of repairs, maintenance, and other expenses. Although periodic general revaluations were envisaged, in practice this was not the case, resulting in an out-of-date rating system.
The system was complicated by the fact that there was more than one rate. The work of the grand juries as they were called was funded by the county cess, levied on occupiers of land, namely tenant farmers. In parallel to the grand juries that were responsible for law and order, and public works (such as repair of courthouses and prisons, maintenance of roads and bridges), there was the poor law unions that provided relief to the poor and maintained the workhouses, financed by the so-called poor rate which was levied, in the main, on the owners of property i.e. landlords.
With the reform of the English system of local government in the 1890s, it was closely followed in Ireland by the Local Government (Ireland) Act, 1898 which was the foundation for Ireland’s system of local government in the 20th century, including the new locally elected county (and borough corporations), urban and rural district councils. All previous local rates were consolidated into one rate levied by the rating authority, and in this instance entirely on the occupiers of rateable property.
There was little change in the system of rates for over a century until the mid-1970s when rates on domestic/residential properties (including farm buildings not previously exempt from rates) were abolished, and replaced with central government support in the form of a revenue grant to meet the cost of domestic rates income forgone. In 1984, based on an earlier High Court case on the valuation system, a Supreme Court judgement culminated in the ending of rates on agricultural land (albeit, for many years a beneficiary of rate reliefs in the form of grants). What remains today after over four centuries of a rating system is rates on non-residential properties only, i.e. rates on the occupier of commercial and industrial property.
While commercial rates as an own-source revenue for local authorities was examined in the 2005 Indecon report on local government financing and the 2009 Commission on Taxation, a more recent review of rates is the Business Rates Review in England conducted by HM Treasury. Although business rates in the UK resemble more a central government transfer rather than a local tax as the rate is determined nationally rather than locally, nonetheless the findings of the 2021 review are relevant. The final report is available here. We finish with an extract from the report, namely that ‘the review reaffirms the importance of rates and their central role in the tax system…’, and that ‘…rates are also a vital source of funding for local authorities’.
December 2021 Local Authority Finances
In this blog we are delighted to announce that the 2021 Council income and spending data are now available on this website. This year’s delay was due to a change in how the budget data was inputted. In future years the use of an app specifically designed for this website means that the update will be available earlier, in the Spring of every year. Do please have a look at the income and spending data, the breakdown into income sources and services, and how Councils compare in terms of spend per head on the local services provided.
In the final blog for this year we present a case study of Galway Council County based on budgetary (as outlined above) and non-budgetary data. A socio-economic profile of Galway County Council presents a picture of a very large local authority with relatively low levels of economic activity. Measured by surface area, it is the second largest council in the country. Measured by population, it is the fifth biggest outside Dublin. Moreover, it has the fourth lowest population density and is the second most rural local authority, with 78 per cent of its population living in rural areas. As a result, levels of commercial activity are relatively small. Indeed, its commercial rates base per person is the lowest in the country. All combined, these structural characteristics result in a local authority with high expenditure needs but a limited tax base to fund local services.
Galway County Council’s annual revenue budget is smaller than the budgets of comparative local authorities, such as Mayo, Tipperary, Donegal or Kerry County Councils, despite having a bigger and faster growing population. To ensure a minimum level of funding available to all local authorities, central government distributes equalisation funding in the form of so called top-up grants, as part of the annual Local Property Tax (LPT) allocations. Galway County Council receives €2.8m per annum in equalisation grants. Equivalent to €15 per head, this is the smallest equalisation grant per person allocated to any local authority in the country, and is less than one fifth of Tipperary or Donegal’s allocation. This is due to an equalisation model that is out-dated, inadequate and, most important of all, unfair. With the revaluation of residential properties for the purposes of the LPT now complete, the Department of Housing, Local Government and Heritage needs to redesign the current equalisation model, as part of a recently announced review of local authority funding.
This underfunding has a significant impact on the provision of local public services to residents in Galway County Council. Measured by expenditure per person, spending by Galway County Council is the joint lowest of the 31 local authorities. Per resident, it spends less on housing & building, road transport & safety, development management, and recreation & amenities than other similar councils in the west of Ireland. The aforementioned spend per head on housing & building is the lowest in the country. Its staff per local authority resident ratio is the lowest among its comparative local authorities, and is the third lowest in the country.
Users of local public services should not be disadvantaged by their place of residency. The purpose of central government equalisation grants is to ensure the fiscal disparities that arise from differences in the economic base of regions or localities are reduced, while still allowing local authorities the tax and spending powers to reflect the preferences of their voters. Unfortunately, the residents of Galway County Council will continue to be disadvantaged as long as the Council’s budget remains underfunded. While local authorities are accountable for setting commercial rates and any annual adjustment to the LPT rate, it is ultimately the responsibility of central government to address this funding inequity.
November 2021 The good, the bad and the ugly of Irish property taxes
- As an underutilised tax, property taxes are less detrimental to economic growth than many other taxes. Indeed, on a ‘tax and growth’ ranking, the OECD found that recurrent taxes on property were the least harmful to economic growth, as compared with corporate income taxes, personal income taxes and consumption taxes.
- From an equitable perspective, property taxes can be viewed as a tax on wealth, and help in redistribution. Given that the majority of household wealth in Ireland is in the form of real property, any attempt to tax wealth should inevitably involve a tax on property.
- From a design perspective, both commercial rates and the LPT score well, with high collection rates, limited exemptions, multiple payment options, and with revenues that are relatively stable and less sensitive than others to oscillations in economic activity. These design features add to the inherent virtues of property taxes, namely, a tax on an immobile base, visible (which, ironically, explains its unpopularity), relatively straightforward to understand, and difficult to avoid.
- Considered a good local tax, property taxes fund key local services, such as social housing, local and regional roads, the fire service, libraries, municipal swimming pools, parks and playgrounds, planning and enterprise supports. Moreover, as the local authorities have rate-setting powers for both commercial rates and the LPT (at the margin), this makes our local representatives responsible for tax and spending decisions, and in doing so, reinforces the case for greater decentralisation.
- Unlike in some other jurisdictions where revaluations have not taken place for many years (1991, in the case of council tax in England), revaluations for commercial rates are periodic and ongoing, and in November we will see property revaluations for the LPT. Regular revaluations strengthen the legitimacy and credibility of these taxes, and in the long run make them more acceptable to taxpayers.
- Commercial rates are a tax on business, and specifically on commercial and industrial properties where commercial activities occur. This is a cost to business, and disproportionately so to businesses with premises as opposed to online businesses with no presence on the high street. The trend towards remote working may accentuate this disadvantage that traditional ‘high street’ businesses face.
- On account of the difficulty in establishing the incidence of tax, the LPT is often viewed as regressive, levied on the owners of residential properties with no consideration of the ability to pay. ‘Asset rich, cash poor’ owners of property, of whom many are elderly, may have difficulty in meeting their annual LPT liability without some form of targeted state assistance.
- Given the crisis in the housing market and the fixed nature of land, the LPT might be better designed as a land or site value tax to encourage better land use and avoid taxing improvements on land. Alternatively, the LPT could work better if operated in conjunction with a vacant property tax as opposed to the current vacant site levy (with the latter to be replaced by a phased-in zoned land tax as announced in Budget 2022), as a way of increasing supply of housing and ultimately making both owner-occupied and rental accommodation more affordable.
- For all the time and effort in establishing, operating and enforcing the LPT, the tax take is relatively low and diminishing as a share of total tax revenue. At less than 1%, there is always the danger that some opportunistic government in the future might abolish it. In the case of commercial rates, although justified given the severity of the impact of the Covid-19 pandemic, the Rates Waiver Scheme was only ever a temporary measure, with the inevitable return to normality in the form of pre Covid-19 rates liabilities as the economy and businesses recover.
- Commercial rates are levied on businesses that do not benefit from local services to the same degree as owners of residential properties do, and unlike local residents, have no vote in elections when local politicians can be held accountable for their tax and spending decisions.
- All taxes distort resource allocation and economic activity, and the same is true of property taxes, albeit less than many other taxes. Although necessary as a means of revenue mobilisation, taxes should be – according to Adam Smith and his famous Canons of Taxation from 1776 – efficient, equitable and simple. Unfortunately for taxpayers and society at large, taxation systems worldwide often fall short of these basic principles. Ireland’s is no different.
The message in this short blog is that although there are many good features to Ireland’s property taxes, reform is needed to deal with the not-so-good elements. However, as we saw with the recent national Budget 2022 and the global reforms to corporate tax rules, for any future changes to LPT or commercial rates the devil is in the details.
October 2021 Residential property taxes and the Irish Local Property Tax (LPT)
Although residential property tax systems differ around the world, the common design features are the tax base (including exemptions and deferrals), liability, assessment, tax rate, and collection/payment. In this blog we will outline these features in the context of the LPT and the revaluation of properties on 1 November 2021.
Tax base The best two sources for the definition of the LPT tax base are the Finance (Local Property Tax) Act 2012 and the Revenue Commissioners. In essence, residential properties suitable for use as a dwelling (occupied or unoccupied) are subject to LPT. Certain properties were and continue to be exempt from the LPT, including properties unoccupied for an extended period by an ill or infirm liable person, or properties affected by pyrite or mica. Other exemptions, including new or unused property purchased from a builder or developer between 2013 and 2021, or properties in unfinished housing estates, will no longer apply and will be liable for LPT in 2022 and thereafter. The biggest change here is the inclusion of new properties that were not assessed in May 2013 and remained out of the tax net since then. It is estimated that this amounts to over 100,000 properties.
As distinct from exemptions, deferrals apply under certain specified conditions (for example, income thresholds, personal insolvency or hardship cases) but are subject to an interest charge on deferred amounts, reduced to 3% from the current 4%. However, taxpayers eligible for an exemption or a deferral must still apply for same, self-assess their property and submit their LPT return, and on time.
Liability The liability for a residential property tax usually falls on the owner or the occupier, and as it is a recurrent tax, it is an annual charge. In the case of the LPT, it is the owner of the residential property who is legally liable. Given the complexity involved in properties and ownership (for example, what happens in the case of joint owners, long-term leases, local authority housing, trusts?) a list of the categories of liable persons is available at revenue.ie.
Assessment There are different assessment methodologies. The LPT is value-based (as opposed to area-based), using market or capital values rather than rental values. Given the urgency with which it was introduced – post the 2008 financial crisis, the EU/IMF programme of financial support and Troika bailout, and the need to broaden the tax base during the years of austerity – and the absence of an up-to-date cadastral or survey records in Ireland, a self-assessment approach was chosen, with valuation bands of €50K in width. The assessment was on 1 May 2013 and was to last until 2016. Due to the political pressure of rising property prices and higher LPT liabilities, the decision to revalue was deferred on a number of occasions. In June 2021, the government announced a number of reforms to the LPT, including a revaluation on 1 November this year. Taxpayers are required to value their properties for the purposes of the LPT, and the amount payable will apply for the next four years, out to 2025.
As for the value of a property, although Revenue will provide an estimated LPT liability (the so-called Notice of Estimate), liable persons are still required to value their property. They can do so by using a number of different valuation sources or guides, including Revenue’s online interactive valuation guide, the Residential Property Price Register, the use of a professional valuer, local real estate agents, or commercial property sales websites such as daft.ie or myhome.ie. Once the taxpayer submits the valuation, Revenue’s estimated liability will be replaced by the self-assessed property valuation and the respective LPT charge. Where there is a difference between the two estimates, and in particular where the self-assessed amount is below the estimated amount payable, Revenue has stated that it will not contest cases where the difference is only one valuation band.
Failure to submit a LPT return or the submission of an undervaluation may be subject to a penalty of €1,000 or a challenge by Revenue, while at the same time, Revenue will pursue the estimated LPT liability amount using the available collection and enforcement options. In addition to the requirement to submit the LPT return by 7 November, taxpayers are also required to pay or make arrangements to pay the LPT for 2022. These details are outlined in the correspondence from Revenue to liable persons, sent by post or online via myAccount or ROS.
Tax rate and take The tax rate is set by central government and was initially 0.18% for properties up to a value of €1m, with a higher rate of 0.25% levied on more valuable properties. The so-called ‘mansion’ tax, this applies to the portion of the value above €1m. Given the increase in property prices and the inevitable rise in LPT liabilities, the government has widened the valuation bands (to €87.5K in most cases) and reduced the lower rate (to 0.1029%, with the higher rates of 0.25% and 0.3%) so that the majority of taxpayers have no change in their LPT liability, while at the same time, keeping the tax take from the LPT close to the current yield (€560m versus €492m respectively). Local authorities will still have the power to vary the basic rate by +/-15% annually, and all revenues accrue to local government with the only change that councils will in future retain 100% of the LPT collected in their administrative area. The new valuation bands and the respective LPT charge are available to view at revenue.ie.
Collection/payment Originally, the precursor to the LPT was the annual household charge and this was administered by the Local Government Management Agency (LGMA) on behalf of the local authorities. After some disquiet, Revenue was given the task to administer, collect and enforce the LPT. Collection rates in 2020 were 96%. Revenue will continue to collect the LPT, and offer multiple payment options, including a single payment using a debit card, credit card, cash or cheque, phased payments/instalments (monthly direct debit or via an approved Payment Service Provider such as An Post) or deduction at source (from salary/occupational pension/government Department).
September 2021 Trends in local authority income and expenditure
Earlier this summer the Department of Housing, Local Government and Heritage published the amalgamated Local Authority Annual Financial Statements 2019 and the Local Authority Budgets 2021. An analysis of the aggregated data from these and similar publications from earlier years provides us with some interesting patterns and trends relating to local authority income and expenditure during the past fifteen years or so, covering the years of the financial crisis, austerity, recovery and the Covid-19 pandemic. Here are our initial observations.
1.At €5.8bn the revenue budget for 2021 is bigger than ever before. Compared to previous years, it is 15% higher than the 2019 pre Covid-19 budget, 49% higher than the trough year of 2015 when the revenue budget was less than €4bn, and 16% higher than the previous peak reached in 2009 when the local authority budget was €5bn. Given the Covid-19 pandemic and the economic and financial pressures that have followed, this level of expenditure on local public services was only possible due to the Rates Waiver Scheme (in 2020 and again in 2021) and other central government supports. Termed government grants/subsidies in the local authority budgets and financial accounts, these specific-purpose grants or transfers amount to €2.2bn in 2021. This is an increase of 184% on the 2015 trough figure of €780m, but also 77% higher than the pre-austerity peak of €1.3bn in 2009. Although acknowledged and welcomed by the local government sector, this level of central government support to the local authorities is unlikely to continue indefinitely. In recognition of this, local councils need to prepare for the post Covid-19 new normal.
2.In terms of recurring expenditures and the eight service divisions, we have witnessed a big change since 2009 when the housing & building and road transportation & safety programmes accounted for 40% of current expenditure (€833m and €1,143m respectively). In 2021, the share for these two service divisions has increased to 55% of the total (€2,065m and €1,152m, respectively). During the 2015-21 period, some of the biggest euro increases in these two programmes were in HAP/RAS (425% increase), homeless service (235% increase) and regional/local road maintenance and improvement (48% increase). Spending on housing services now accounts for over one third of the annual local authority revenue budget.
3.A noticeable change has taken place in the share of revenue income accounted for by central government grants as against local own-source revenues (namely commercial rates, LPT and charges). In the years 2007-09 the grants/own-source split was 44%/56%. The Commission of Taxation 2009 concluded that implementation of their proposals (including an annual property tax) would see by the end of the five-year period local authorities sourcing ‘…well over 75% of their income from their own generated sources’. By 2015, that ‘target’ had been met with the own-source share equal to 77% of revenue income. However, since then we have seen a reversal of that trend, due to a big increase in central government specific-purpose grants and, more recently, the Rates Waiver Scheme for ratepayers adversely impacted by the pandemic. With the latter treated as a grant or transfer to the local authorities, the grants/own-source split is 53%/46% in the 2021 budget. Although temporary, the future trend in the share of income accounted for by own-source revenues is uncertain. Among other things, this has implications for the autonomy and accountability of the local government sector in Ireland.
4.As for capital spending, although capital expenditure has increased in recent years (from a low of €1.1bn in 2014 to €2.8bn in 2019 – an increase of 159%) it is still well below its peak of €6.9bn in 2007. Expressed in percentage terms, this is still 40% below the level of public investment by local authorities in the boom years that preceded the 2008 financial crisis. Although unexpected, this boom-bust cycle in capital expenditure is unhealthy for the local authorities and the economy at large.
5.As with current expenditure, capital spending is primarily in housing and roads infrastructure. These two programmes accounted for just over 70% of capital spending in 2007, and 82% of capital spending in 2019. While both programmes have seen an increase since the trough of 2014 (when spending on both programmes had fallen to less than a combined figure of €700m) to almost €2.3bn in 2019, these amounts are still well below the 2007 levels (about 55% and 30% smaller than their 2007 figures, respectively).
6.As for total (current and capital) spending by the local authorities, whereas total expenditure was over €11bn annually in 2007/08, it had fallen to a low of less than €5bn by 2014 before recovering to almost €8bn by 2019, with a further increase recorded in 2020. In terms of funding, 50% of total 2019 local government spending is funded by central government grants, comprising current and capital grants. Compared to the earlier years of 2009 and 2014, the respective figures were 56% and 36% respectively, reflecting the public finances of central government and the underlying economic environment of the time, both nationally and locally.
In a future blog we will examine local authority income and expenditure disaggregated by local councils as there are sizeable differences between local authority revenue and spending, due to variations in the profile of local administrative areas, their respective residents and levels of economic activity.
Note: The data here are all expressed in nominal terms. The source for the data used is the Department of Housing, Local Government and Heritage, and the local authority budgets and financial statements. An alternative source is the Central Statistics Office (CSO) and the government finance statistics. As is common with different sources, there are differences in the data. For more on the CSO local government finance data, see https://www.cso.ie/en/statistics/governmentaccounts/
August 2021 Revenue assignment, motor tax and commercial rates
The effects of the Covid-19 pandemic on the economy may be long lasting, with the economics profession often citing what they call scarring effects. One such impact is on the finances of the local government sector, and, in particular, the effect of the lockdown and the subsequent contraction in economic activity on the own-source revenues of local authorities. Although this has been partly mitigated during the pandemic by the central government’s compensation to local authorities for commercial rates income forgone vis-à-vis the rates waiver, there is the long-term issue of the sustainability of rates from commercial properties given the megatrends of online retail, remote working, and city centre businesses and their workforce seeking relocation in their search for lower costs and more space.
Given this background, recent patterns in local government funding and likely future trends, this blog has two objectives. Its purpose is to present a new and sensible source of revenue income for local authorities based on sound principles of local public finance and revenue assignment, while at the same time, grow the rateable base of local authorities by providing for a reduction in commercial rates for existing ratepayers, but also on new business formation with rateable properties.
We begin with our conceptual framework. Any discussion on intergovernmental arrangements and fiscal decentralisation can be framed using the so-called five pillars or building blocks of intergovernmental finance. The five pillars are the territorial and institutional arrangements, expenditure assignment, revenue assignment, intergovernmental transfers, and borrowing and debt. Here we are interested in the revenue assignment pillar, namely the revenues that are assigned to the different tiers of government.
From the intergovernmental finance literature, we know some basic guidelines for assigning revenues. They are administrative feasibility, economic efficiency, equity, political acceptability and revenue potential. This allows us to assign taxes to different tiers of government. For example, customs, corporate and personal income taxes, wealth taxes and resource taxes should all be centralised because of their nature i.e. taxes on mobile factors of production, progressive redistributive taxes, taxes suitable for economic stabilisation, unequal tax bases between jurisdictions. In contrast, residence-based taxes such as excise tax, and benefit-related taxes such as business taxes should be levied by regional/provincial governments. Finally, taxes on immobile factors such as property or land should be assigned to municipalities.
With subnational government providing goods and services characterised by limited spillovers and limited economies of scale, on the funding side we know what constitutes a good local tax i.e. levied on relatively immobile bases and imposed mainly on local residents, easily administered locally, with a base that is relatively evenly distributed, and with yields that are relatively stable over the economic cycle.
Our interest here is on taxes assigned to subnational governments and, in particular, the case of motor taxes assigned to local government, where revenue from the tax levied on motor vehicle ownership accrues to the local authority where the owner of the vehicle resides. A central feature of any good system of local government is the matching or benefit principle i.e. linking the taxes paid with the benefits received and in line with the costs of the service provided. As with benefit-related taxes, the motor tax accrues to local authorities, and, in turn, is used for the delivery of local services including the maintenance of local roads, traffic management, road safety, street cleaning, etc.
For this reason, motor taxes are generally considered to be good candidates for assignment to subnational (or in the Irish case, local) government. We already know that a property tax is a good local tax. Although not on a par with property taxes due to the mobile nature of motor vehicles, what is less well known is that a motor tax meets many of the criteria of a good local tax.
For some tax sources, tax base and revenue sharing mechanisms are popular, where, in the case of the latter, revenue is shared between two or more tiers of government. Given the theoretical argument outlined above to assign motor taxes to local government, combined on the other hand with the political necessity for central government to retain its current tax sources, a compromise is a revenue-sharing arrangement with respect to motor tax, where the motor tax revenue is shared between central and local government. The actual fixed share is a political decision based on political economy considerations and other constraints, and would normally be subject to periodic review and adjustments.
Before the local government reforms and the introduction of the Local Property Tax (LPT) in the mid 2010s, motor tax was assigned to local rather than central government. More specifically, it was paid into the Local Government Fund (LGF), which, in turn, allocated monies to local authorities in the form of central government grants, both general-purpose payments and specific-purpose grants for non-national roads. Motor tax income was about €1bn per annum. With the establishment of Irish Water, the introduction of the LPT and other changes to local government funding, motor tax is now paid to the Exchequer for central government spending.
Rather than assign this revenue source to only one level of government, our proposal is to share the yield between central and local government, on a pre-determined basis. As already alluded to, revenue-sharing arrangements between different tiers of government are common in other jurisdictions, and especially in many Central and Eastern European economies. Revenue sharing of tax receipts on ownership of motor vehicles is also not uncommon. Indeed, in many countries motor vehicle tax is typically a shared tax with local governments receiving 50 to 100% of the yield.
For illustrative purposes, we take the financial year 2019, and motor tax receipts of €964m. In our simulations, we take a modest 25/75 split, with 25% of motor tax receipts accruing to local government on a derivation basis i.e. shared in proportion to the revenue collected in each local authority. With a 25% share to local government, amounting to €241m in 2019, this translates into a 16% reduction in commercial rates income needed by local authorities to balance their adopted budgets.
In terms of the Annual Rate on Valuation (ARV) which when multiplied by the rateable valuation of a property determines the annual ratepayer’s liability, this amounts to a 20-25% average reduction in the ARV. While urban councils, in Dublin and Cork for example, that depend relatively more on rates for their annual income could see, on average, a rate cut of up to 15% or so, some smaller rural councils could implement a reduction in the ARV of up to about 30%, while at the same time, continue to maintain public services and manage the local public finances. Whatever the precise cut in the ARV, it amounts to a significant and permanent reduction in the annual rates bills for businesses with rateable properties.
It is important to restate that these ARV reductions do not mean cuts in local public services or any softening of subnational fiscal discipline. The revenue-sharing arrangement whereby local government is assigned 25% of motor tax revenues affords local authorities the opportunity to maintain the level of public service provision and balance their annual revenue budgets but all at a lower ARV as a smaller amount of commercial rates needs to be levied.
We recognise that the annual extra income from motor tax could be used in alternative ways to, for example, improve public services or increase reserves to fund capital projects in the future. Although a policy choice for local authorities, we believe that in the current circumstances priority should be given to reducing commercial rates as a way to grow the local economy post Covid-19. As for the Exchequer, the cost to the central government of sharing a revenue source and the tax income forgone is offset by a local government sector that is financially more sustainable, and a local economy bigger in size. This proposal to reassign revenues and reduce rates can be a win-win for all.
July 2021 How to make the Local Property Tax more acceptable to taxpayers
With the revaluation of properties due on 1 November, there are a number of measures that Revenue and the authorities could take that will improve the integrity and legitimacy of the Local Property Tax (LPT). Informed by the literature on the political economy of property tax reform we know what matters and what works, subject to the usual country-specific circumstances. Given the unpopular nature of property tax with voters and politicians in Ireland and worldwide, here are some actions that would make the local property tax system in Ireland more acceptable to taxpayers.
1. It is widely acknowledged in economics that there are good and bad taxes. Property taxes are considered to be good taxes as they distort economic activity, behaviour and decision-making less than do other taxes. Aside from the virtue of neutrality, a property tax has many of the characteristics of a good tax: it is salient, hard to evade, predictable and relatively stable. The Irish government needs to continue to make the case for property taxes, as a way of mobilising revenue, widening the tax base, taxing wealth (rather than labour or transactions, for example) and funding local government.
2. Unlike many other taxes, property taxes can be viewed from very different perspectives. For some, it is a tax on capital. For others, it is a tax on housing consumption while alternatively it can be seen as a benefit charge, paid as a price for locally-provided public services. Governments can take advantage of this when making the case for property taxes. By tailoring the message, they can make the property tax more tolerable to taxpayers and citizens.
3. While accepting that the LPT is a tax on property (but on residential properties as opposed to commercial or industrial properties which are subject to business rates), it is sometimes forgotten that it is a local tax. It is a tax assigned to local government, with the burden falling on local residents who use local services. Because of its immobile nature, and that it varies with changes in economic activity less than income or consumption taxes do, it makes for an ideal local tax. While the base, assessment and collection are decided centrally, local authorities have rate-setting powers at the margin, where they can vary the base rate by +/- 15% per annum. Aimed at strengthening local government and promoting decentralisation, this makes local authorities accountable to their electorate, and on the hook for tax and spending decisions. In defending the LPT, authorities need to remind taxpayers of the local dimension to the tax, and of the importance of local autonomy and the principle of subsidiarity.
4. Revenue and the local authorities can inform taxpayers of the link between the LPT and local services. These include social housing and homeless services, local and regional roads, planning and local enterprise supports, fire service, library services, leisure and public parks. As property values for purposes of the LPT are self-assessed, there is always the likelihood that some taxpayers will undervalue their properties. In advance of the assessment date but also when LPT bills are issued, a list of the local public services that are funded by the LPT (in specific terms, using euro amounts, or percentages) should be communicated to all taxpayers, by means of traditional post but also a public awareness and social media campaign. In addition, if local authorities use their discretionary powers to increase the base rate, details on how the extra funding is spent (on what services, and by how much) should be communicated to the public.
5. In the interest of transparency, the communications campaign should also include the old and new valuation bands, and the respective charges, so that taxpayers understand their LPT bill, how it is calculated and any changes from the initial liability.
6. The reasons for the revaluation (and future periodic reassessments to reflect changes in property values) need to be fully explained and justified. An out-of-date assessment can undermine the short-term credibility and long-term sustainability of the property tax, lead to inequities across the distribution of taxpayers, and make future revaluations politically difficult, as we know from other countries including the UK and Germany.
7. The LPT has a very high compliance rate, estimated at over 94% in 2020. Indeed, this is one of the successes of Ireland’s residential property tax. The involvement of Revenue as the tax collection agency is viewed by many as a contributing factor, as well as the multiple payment options (including deduction at source, from salary, pension, or welfare payments, which helps mitigate the unpopular visible nature of the tax). Continuation of these options should help to retain the high compliance rate.
8. One common complaint against the property tax is its regressivity (perceived or otherwise), inequity (unrelated to ability-to-pay) and impact on low-income property owners, the so called ‘asset-rich, cash-poor’ argument. Aside from the existing exemptions and deferrals, consideration could be given to the introduction of a tax credit for low-income taxpayers as this may be the best solution to resolve this issue.
Although we can be certain that taxes and particularly property taxes will never be liked by taxpayers, a greater acceptance of taxes on properties is both desirable and achievable.
June 2021 Reform of the Local Property Tax
In June 2021 the Minister for Finance announced changes to the Local Property Tax (LPT). The Government had approved the reforms at a Cabinet meeting, and the Minister published the general scheme of the Finance (Local Property Tax) (Amendment) Bill 2021. The main aims of the reforms are to revise property valuations and to make previously exempt properties subject to the tax.
The LPT was introduced in 2013, as part of efforts to broaden the tax base after the financial crisis and the Great Recession. The tax rate is 0.18%, and the valuation date is the 1st May 2013. To allow a degree of fiscal autonomy, councillors in local authorities vote each year whether to apply the basic 0.18% rate, or to adjust the rate by up to +/- 15%. This is known as the Local Adjustment Factor (LAF). Reviews of the LPT were published in 2015 and 2019. For various reasons, plans to apply updated current valuations to properties were postponed several times. The Programme for Government published in June 2020 committed to (1) bring forward legislation for the LPT on the basis of fairness and to ensure that most homeowners will face no increase, (2) bring new homes, which are currently exempt from the LPT, into the taxation system, and (3) retain all money collected locally within the county.
The reforms announced in June 2021 provide the detail on the implementation of these plans. The main reforms are as follows:
- Revaluation date of 1st November 2021
- Rate cut and bands widened for calculating LPT liabilities to ensure that most homeowners will face no increase when properties are revalued on 1st November 2021
- Property valuations to be reviewed every four years
- New properties will be brought into the system each November
- Some currently exempted and excluded properties will become subject to LPT (for example first-time buyers and unsold trading stock)
- Modifying the exemption for properties vacated by persons due to illness
- Increased income thresholds for deferrals
- Reduction in the deferral rate of interest
- No change in Local Adjustment Factor
- Local authorities to retain 100% of LPT collected in their area
At the moment, an LPT liability is calculated by applying the tax rate to the midpoint of a particular valuation band. There are 19 bands covering valuations up to €1m, and the standard tax rate is 0.18%. For properties worth over €1m, no banding applies, and an actual value must be declared. The LPT liability is 0.18% of the first €1m, and 0.25% on any excess.
The LPT Amendment Bill proposes to keep the number of valuation bands at 20, but to widen them, so that the first 19 bands cover properties up to €1.75m. To ensure that most owners will not face an increase in their LPT, the basic rate will be reduced from 0.18% to 0.1029%.
Properties in bands 12-19 (between €1.05m and €1.75m) will be charged a mid-point rate of 0.1029% on the first €1.05m and 0.25% on the balance over €1.05m. Properties in band 20 will be charged on the individual property price as before, with a higher rate of 0.30% applied on the value in excess of €1.75m (0.1029% on the first €1.05m, 0.25% between €1.05m and €1.75m, and 0.30% on the balance).
Based on modelling done by civil servants, the best estimates of the impacts of the planned changes to the tax base and rates on LPT liabilities are as follows:
- 11% of house owners will see a decrease
- 53% of house owners will see no change in liability
- 33% of house owners will see an increase of up to €100 (generally one band)
- 3% of house owners will see an increase over €100 (generally two bands)
The Bill proposes that 1 November 2021 be the next revaluation date, and provides for 4-year revaluation periods after that. New properties becoming liable each year will be assessed as if they had existed at the previous valuation date.
The Bill proposes to remove various exemptions, and make these properties subject to the tax. One exemption is any house purchased or built as a principal private residence in 2013 (Section 8 exemption). Another is any new or unused property bought from a builder or developer between 1 January 2013 and 31 October 2021 (Section 9 exemption). A third exemption applies to houses in ‘unfinished housing estates’, also known as ‘ghost estates’ (Section 10 exemption). The temporary exemption for houses damaged by pyrite will be phased out, but a temporary exemption for houses affected by defective concrete blocks in Donegal and Mayo will be introduced. The number of extra properties to be made subject to the LPT is estimated at 100,000. This explains much of the planned increase in the LPT yield, from an estimated €492m in 2021 (before any local adjustments) to a planned €560m.
Currently, if an elderly or infirm person vacates a property on a long-term basis, the property becomes exempt from LPT, as long as it remains unoccupied. This condition may be one reason why some houses are left vacant. In the context of the housing crisis, this condition is being modified to allow occupation, without losing the exemption.
Some other changes planned in the Bill include: ‘co-living’ developments will be defined as residential property and the normal Revenue compliance checks will be applied to self-assessed valuations, whereas previously Revenue accepted the 2013 valuations at ‘face value’.
The LPT is part of the fiscal equalisation process in Ireland, as 20% of LPT receipts from each local authority are pooled, and redistributed to councils with weaker finances. The Bill proposes that 100% of LPT receipts will remain in each local authority. The Bill does not contain any detail on how fiscal equalisation will be organised or financed in the future.
Overall, the planned revaluations of residential properties for the purposes of the LPT, and the commitment to regular revaluations, as well as the other reforms are welcome improvements to the operation of this tax.
May 2021 What the data tell us about public housing and the housing market
As local government in Ireland is the tier of government responsible for social housing, local authority expenditure on housing equates, more or less, to Ireland’s public sector expenditure on housing. Given this, an analysis of local authority budgets, financial statements, performance indicators, and housing statistics from the Department of Housing, Local Government and Heritage provides us with some interesting stylised facts about social housing.
Housing is the main social service provided by local government in Ireland. Indeed, of the eight service divisions or statutory functions assigned to the local authorities, housing is the largest. The housing service division involves responsibility for the provision of social housing, housing maintenance and estate management; supports to private rental accommodation; inspection and enforcement of regulatory standards for private rental accommodation; urban renewal and regeneration schemes; homeless services; and traveller accommodation.
The annual budgets of the local authorities report the day-to-day spending on housing. Of a total estimated spend of €5.6bn in 2020, €1.9bn was for housing and building services, representing an increase of over 150% since 2013 when the recurring housing budget was at its lowest during the years of austerity. At 35% of the 2020 total revenue budget, this is far by the largest service division, with the others being roads (20%), environmental and fire services (12%), recreation and amenities (9%), development management and planning (9%), water services (7%) and others (9%).
Of this €1.9bn, over €1bn is spending on supports to private rental accommodation in the form of two housing supports schemes, namely RAS (Rental Accommodation Scheme) and HAP (Housing Assistance Payment). This reflects an earlier move by successive Irish governments away from direct public provision of social housing to a greater reliance on the private sector to meet social housing need. €275m is spent on maintenance and improvement of local authority housing units, as is a further €273m on homeless services (equal to a 4 fold increase since 2014), with another €130m spent on housing loans and grants.
As for capital expenditure, according to the most recent amalgamated audited annual financial statements of the 31 local authorities, capital expenditure was €2.3bn with housing accounting for 60% or €1.4bn, up from a low of just €350m in 2014. Over a decade ago, the housing budget accounted for only about 35% of a much larger capital budget of over €6.5bn. When taking current and capital expenditure together, the total housing spend is now over 40% of total local government spending, as compared with only about 25% at the time of the 2008/9 financial crisis.
What about annual social housing output, and the stock of local authority housing? Leaving aside Approved Housing Bodies (AHBs) and Rent Supplement administered by the Department of Social Protection, local authorities provide social housing through a number of different mechanisms. Taking 2019 as a recent example, a total of over 24k local authority housing units were delivered in the form of new build (2,271), acquisition (1,905), Part V of the Planning and Development Acts (589), voids (303), leasing (1,161), RAS (1,043) and HAP (17,025).
In 2019, local authority new build and acquisition combined was over 4,000 units, a figure last seen at the outset of the Great Recession, which was then followed by years when local authority new build and acquisition was as low as 300-700 units per annum. Although RAS/HAP filled this gap and now account for a greater percentage of yearly output, the stock of social housing units is still primarily provided by local authorities, with almost 140k units in 2019, or about 55% of the estimated total social housing stock.
Given all these statistics, how can local authorities help to solve the housing crisis? Aside from direct provision of social housing funded by existing sources (primarily the Housing Finance Agency) other sources of finance such as the European Investment Bank or, in the longer term, use of a municipal bond agency or direct local authority issuance of muni bonds as in other local government systems worldwide should be considered.
Furthermore, changes to the existing Vacant Site Levy (VSL) which clearly has not worked (see the Nov 2020 NESC report Housing Policy: Actions to Deliver Change on a proposed Site Value Tax) and to the Local Property Tax (LPT) as outlined in the recent ESRI Options for Raising Tax Revenue in Ireland report of May 2021 could also be enacted. In conjunction with the private sector and as part of a long-term housing strategy, greater direct provision of local authority housing can result over time in an increase in the supply of affordable housing, a reduction in rents in urban centres and, hopefully, a well-functioning housing market in Ireland.
April 2021 Ireland and the Local Autonomy Index
Measuring decentralisation and local autonomy is a challenging task. It is even more difficult if it is used for international comparative purposes, as local government systems differ around the world. In this blog we outline the Local Autonomy Index (LAI), and apply it to intergovernmental relations and multilevel governance in Ireland.
In the mid 2010s, the European Commission funded a project to develop a comprehensive methodology for measuring local autonomy, resulting in the LAI. This study was based on a review of the scholarly literature and, more specifically, an earlier methodology applied to regional authorities across 42 democracies. Applied to municipalities and local councils, and using reliable and comparable data, the result was an index of local autonomy based on 11 core elements or variables: institutional depth; policy scope; effective political discretion; fiscal autonomy; financial transfer system; financial self-reliance; borrowing autonomy; organisational autonomy; legal protection; administrative supervision; central or regional access. Whereas the first eight of these are identified as self-rule, the last three are categorised as interactive rule, which characterises the relation between local government and higher tiers of government.
A standardised code book was developed where each of the 11 variables are defined and operationalised. For example, given our interest and research output in the area of local government funding, we report here the definitions relating to the four funding variables. Fiscal autonomy is defined as the extent to which local government can independently tax its population. The financial transfer system variable is measured as the proportion of unconditional financial transfers to total financial transfers received by the local government. Financial self-reliance is defined as the proportion of local government revenues derived from local/own sources. As for the borrowing variable, it is simply the extent to which local authorities can borrow, and if so, what restrictions apply.
Using the five pillars of intergovernmental fiscal relations framework (that is, the institutional arrangements; expenditure assignment; revenue assignment; intergovernmental transfers; borrowing and debt) the two variables that relate to expenditure functions are the policy scope (defined as functional responsibilities for provision and delivery of services) and the political discretion, defined as the extent to which local government has real decision-making powers.
Results were first published in 2015, with assessments by individual country experts. As expected there is much variation, with respect to variables, across countries and over time. For the 39 European countries in 2014, on a scale from 0 to 37 the range was a high of in excess of 28 (Switzerland, Finland, and Sweden, for example) to a low of less than 16 (Cyprus, Georgia and Moldova), with an average score of 22. Given the tradition of centralised governance found in Anglo-Saxon countries, the LAI for UK (433 local authorities) and Ireland (31 local authorities) was at the lower end of the scale, at 17 and 15 respectively. For Ireland more specifically, the scores for institutional depth, financial self-reliance and central or regional access are relatively high, whereas the scores for policy score and political discretion, the financial transfer system and borrowing, and the legal protection and administrative supervision are all low, indicating a highly centralised system of governance, with limited legal protection, functions, and discretion.
With respect to specific variables for all 39 countries, whereas institutional depth scores the highest, the lowest (mean) scores are for effective political discretion and fiscal autonomy. As for changes in the LAI over time, the index increased during the period 1990-2014, arising from an increase in almost all variables measured, the only exception being borrowing autonomy. In 1990, the average score was 19.5; by 2014, it was 22. This reflects an overall increase in local autonomy, indicating greater decentralisation during this 25 year period.
The scores are currently being updated, for the period 2015-2020 with the coverage extended to a much larger set of countries beyond Europe. Ireland’s LAI for 2020 is 16.5, showing little change in local autonomy over the period but also confirming Ireland’s intergovernmental system as highly centralised, from a political, administrative, functional and financial perspective. The LAI simply reinforces what is widely known, and that is an intergovernmental system in Ireland characterised by a high degree of centralisation and a low degree of local autonomy.
For more information, see the websites below on the self-rule index project and the European Charter of Local Self-Government
March 2021 The issue of equalisation payments to financially-weaker councils
In this monthly blog we return to the issue of fiscal equalisation that we addressed last August, and present here some new evidence and interesting findings. Acknowledging differences in fiscal disparities due to variations in the economic base of localities, the objective of equalisation is to equalise fiscal resources of local councils, with the ultimate aim to reduce interjurisdictional inequalities in expenditures on public services.
Currently, the stated public policy aim with respect to equalisation grants is that local authorities that are in shortfall receive equalisation funding so that their total Local Property Tax (LPT) allocation is equal to the baseline. The Department of Housing, Local Government and Heritage define the baseline as the minimum level of funding available to every local authority, with funds ‘…redistributed to provide additional funding to certain local authorities that have lower property tax bases due to the variance in property values across the State’. Local authorities in shortfall receive an equalisation grant equal to the difference between the LPT retained locally (80% of LPT) and the LPT baseline, which, in turn, is equal to the 2014 general purpose grant allocation and the Pension Related Deductions (PRD) retained by the local authority.
Given that the current system of equalisation is based on historical data from (what was generally recognised as) an overly complex needs and resource model, it is our view that the current equalisation scheme is not fit for purpose, as it is insufficient, non-transparent, and may even result in inequities across some local authorities. One often-cited example is Galway County Council and its annual equalisation grant of less than €3m, compared with equalisation payments in excess of €11m and €16m for neighbouring Mayo and Tipperary County Councils respectively, which have, arguably, similar socio-economic and demographic profiles.
We outlined our new methodology in last August’s blog, where we use a fiscal or revenue-raising capacity model to generate equalisation transfers. The advantage of using potential rather than actual revenue is that an assessment of fiscal capacity is independent of the tax rates levied, the enforcement effort or taxpayer compliance. In addition, from an incentive perspective, it is superior to actual revenues as the use of the latter may incentivise local governments to collect less tax in anticipation of more transfers or grant funding.
Using all own-source revenues (namely, commercial rates, LPT, fees and charges), the formula for the equalisation grant under the proposed scheme is the difference between the fiscal capacity of a local authority and the standard, defined in this case as the national average of the fiscal capacity estimates. If the fiscal capacity of a local authority is less than the standard, a local authority receives an equalisation grant equal to this shortfall.
Although our research (due to be published in The Economic and Social Review in Spring 2021) was for the fiscal year 2017, similar results are likely for subsequent years. The local authorities that receive equalisation funding under the two schemes are the same, more or less. In 2017, there were 21 recipients under the existing scheme, as against 22 under our scheme, with Cork City Council, Meath County Council and Wicklow County Council the only differences between both schemes (the latter two councils receive equalisation grants under our proposed scheme whereas Cork City Council was in receipt of equalisation funding under the actual scheme). However, that is where the similarities end.
There are many differences. For one, whereas in the current system it is the richer local councils that primarily fund the equalisation pot (vis-a-vis 20% of the estimated LPT yield), in our proposed scheme the funding comes from central government. Secondly, the amount of the equalisation fund differs, from €210m in our scheme as opposed to €135-140m in the current scheme. Thirdly, given the highly political nature of fiscal equalisation, the new redistributive scheme results in winners and losers. Aside from Meath County Council which is a new recipient (as it has a relatively low rates base), in total euro terms the biggest winners are Galway, Wexford, Laois and Donegal County Councils, and Limerick City and County Council. These five councils together gain an estimated €55m per annum from the operation of the new model.
Aside from Cork City Council (which is no longer a local authority in receipt of an equalisation payment due to the 2019 boundary extension), the biggest losers are Tipperary, Leitrim and Monaghan County Councils, with these three councils losing approx. €11m gross per annum. While there are only a small number of losers, they are compensated by the fact that they retain 100% of their LPT yield under the new scheme. Any further losses can be offset by locally determined increases in rates (that is, a higher ARV), increases in the LPT rate (via the Local Adjustment Factor), or where necessary, a temporary transition payment from the Department.
While these political economy issues need to be addressed, we believe that a new formula-based equalisation model based on fiscal capacity estimates will result in equalisation payments and a local government funding system that is more objective, sustainable, and most importantly of all, equitable.
February 2021 Local budgets and fiscal rules
While central governments are borrowing extensively to finance day-to-day spending during the Covid-19 pandemic, local governments are required to adopt a balanced budget. Continuing from previous blogs on local authority budgets, this opinion piece addresses the issue of local budgets and fiscal rules.
In general, fiscal rules are a special case of policy rules that, in turn, are part of the much wider rules versus discretion strand of literature in macroeconomics. Often expressed as pre-determined numerical limits on budgetary aggregates or indicators, fiscal rules are long-lasting institutional constraints on budget policymakers’ decision-making discretion, aimed at fostering prudent fiscal policy, promoting overall fiscal discipline, and ensuring long-term fiscal sustainability. Although they can apply to all levels of government (supranational, national, regional) here we are interested in local fiscal rules, as applied to municipalities, cities and county councils.
The rationale for fiscal rules is based on the phenomenon that politicians and governments suffer from a deficit bias, which leads to an adverse incentive to overspend, under tax or borrow excessively. This deficit bias can often be explained by persistent expectations of local governments to receive transfers from upper tiers of government while at the same time, the tendency to push the burden of fiscal discipline to future generations and/or cater for interest groups at the cost of taxpayers in order to increase the likelihood of re-election.
Fiscal rules are not a recent invention. Several countries have a balanced budget rule in their constitution and some of those date back to the end of the nineteenth century. In the US, for example, the states adopted balanced budget rules of varying strength before the year 1900. However, by 1990 the IMF fiscal rules database still showed less than ten countries worldwide having implemented fiscal rules on either a national or subnational level. By 2009, the number of countries had increased to 80. Moreover, arising from reforms in fiscal government frameworks and the perceived success of fiscal regulation, the number of rules for lower levels of government has soared in the past couple of decades.
There are different types and characteristics of fiscal rules. Pertaining to local rules, the main types are the budget balance rule (BBR), borrowing and debt rule, expenditure rule, revenue rule and the no-bailout rule. The requirement in Ireland for local authorities to balance the annual budget is an example of a BBR. It is the most common fiscal rule applied to local government, with the vast majority of EU countries having some version of the BBR. The next most popular is the constraint on borrowing and debt, often in the form of the so-called golden rule where borrowing is limited to investment purposes.
We know from the literature on fiscal rules and the experience of governments across time and space that the design of fiscal rules matters, in terms of the impact and effectiveness on fiscal outcomes. Design features relate to rule characteristics such as the fiscal framework, scope and time horizon, escape clause and sunset provision, accounting system and auditing standards, but also enforcement and sanctions for non-compliance. Recent economic events have seen adjustments to these design features, not only in relation to coverage, legal basis and enforcement, but more broadly, in terms of their type and number, partly in response to economic and fiscal crises, but also lessons learnt from cross-country experiences.
Applying and enforcing fiscal rules is as much a political economy issue as it is an administrative and technical matter. Indeed, if strictly enforced in a mechanical way, as with any blunt instrument of governance, fiscal rules can have unintended consequences. Hence, flexibility is necessary, with policymakers needing to consider cyclically adjusted rules combined with temporary escape clauses in times of economic crises. Furthermore, they are not a substitute for sound fiscal policy, or for a well-designed system of intergovernmental fiscal relations. Likewise, they are not a necessary condition for fiscal adjustment or consolidation. Political commitment and will is important, as is broad electoral support.
As with other elements of intergovernmental fiscal relations, fiscal rules are country-specific when it comes to their design and application. Indeed, there is great diversity in country approaches and experiences. These cross-country differences need to be carefully considered when tailoring suitable local fiscal rules, as we know from elsewhere that one size does not fit all. With no ideal or best rule, the choice of rule or set of rules will depend on country circumstances, economic structure, and initial conditions, the wider intergovernmental fiscal framework, and the priority given to different policy objectives.
As in the case of Ireland, although further reforms are likely, local fiscal rules are here to stay, as an established part of the intergovernmental fiscal framework where spending and taxation powers are decentralised, and where local authority budgets play an important role in benefiting both the livelihoods of local businesses and the lives of local residents.
January 2021 The impact of the coronavirus pandemic on local authority Budgets
The coronavirus pandemic has had a severe impact of the finances of central governments across the world. This blogpost examines the impact of the pandemic, and the associated economic contraction, on the finances of local governments in Ireland, specifically Galway City Council and Galway County Council.
As expected, central government tax revenues declined, and current expenditures rose, during 2020. Given the forecast 6.5% fall in modified domestic demand during 2020, the decrease in tax revenues is less than might be expected, at just 3.6%. In contrast, net voted public expenditure rose by 25%, reflecting huge increases in expenditure on healthcare and social protection. We wish to examine what is happening to local government revenues and expenditures, by looking at the adopted Budgets for 2021. Based on the two Galway councils, the conclusion is that the pandemic has not significantly affected overall revenue and expenditure, due to two main reasons: the central government has paid large grants to replace commercial rates income, and local expenditure assignments are limited and not exposed to macroeconomic fluctuations.
Galway City Council plan to spend €102.5m on current services during 2021, which is a rise of €2.8m, or 2.9% on the adopted Budget figure for 2020. The change in planned current revenues is the same, as local authority Budgets must be balanced. Galway County Council plan to spend €136.6m, a bigger rise of 6.6% over the amount in the 2020 adopted Budget. Given the slight deflation in consumer prices during 2020, these represent reasonably significant increases in real expenditures.
On the revenue side, neither council is planning any increase in their own-source revenues: commercial rates, fees/charges and the Local Property Tax (LPT). This means that own-source revenues will slightly decline as a share of total revenues, and the dependence on central Government grants will rise.
Starting with commercial rates, both councils voted to make no change to the Annual Rate on Valuation. The elected members of Galway County Council rejected proposed increases in rates in 2019 and 2020, and opposed any increase in 2021. Given that, and conscious of the impact of the pandemic on businesses, the 2021 Budget was prepared with no proposed rates increase even though such would have been required to maintain expenditure at 2020 levels.
In response to the pandemic, the central government introduced a Commercial Rates Waiver scheme. This means a 100% waiver was applied to all businesses with the exception of a small number of categories, mainly banks, utilities, large supermarkets and corporates. The waiver was extended twice, and in total covers the nine months April to December 2020. The central Government allocated €900m for the waiver, and this is a very significant support to businesses and local authorities. By the end of December, Galway City Council received €20.7m and Galway County Council received €10.5m <where did you get this information?> To underline the scale and significance of this support, these grant payments represent 20% of the City Council’s income. The Chief Executive states that the waiver scheme “has been fundamental to the city council’s finances in this challenging year and it has ensured that the council has not had to significantly curtail any of its services to the public. The scheme has enabled the council to continue to deliver all essential services during the COVID pandemic. The scheme has been essential to the survival of many businesses and it has also ensured maintenance of significant employment levels within many enterprises.” The Chief Executive had expected that the Council might face a €20m deficit in 2020, but central Government supports mean the expected deficit is much less at €250,000.
The central Government has indicated that the commercial rates waiver will continue into the first quarter of 2021, although it will be more targeted at firms most affected by level 5 restrictions.
The secondown–source revenue is fees and charges from providing goods and services, for example rents charged on social housing and car parking fees. Neither local authority plans any significant changes to the levels of charges. The County Council expects this income to rise by about 2.7% to €36.4m. As the city is more reliant on visitors, tourism, and hospitality related businesses, the travel restrictions have a much bigger impact on the City Council. The Budget expects these revenues to fall by €3m or 11%, to €23.8m. The two largest decreases are a €1m fall in parking fees and a significant €2.7m fall in income from Recreation/Amenity/Culture. This includes a large decline in income from Arts events.
The Local Property tax is by far the smallest of the three own-source revenues. The central Government sets the main rate, 0.18%, and local authorities can implement a Local Adjustment Factor of +/- 15%. The majority of local authorities voted to use their autonomy and increase the LPT rate for 2021.Three councils, all in Dublin, voted to continue to cut the rate. Six councils voted to make no change, including the two Galway authorities. In the Galway County Budget, the Chief Executive states that LPT receipts have remained static since 2014.
Turning to specific-purpose grants and subsidies received from the central Government, both local authorities expect significant increases: a rise of €6m or 19% in the City Council, to €36.7m, and a rise of €7m or 15% in the County Council, to €55.6m. The pandemic is not the sole cause here; rather they reflect efforts to deal with deficits in housing supply and transport. For example, the County Council plans to receive an extra €5m in transport grants, while the housing grants paid to the City Council are due to rise by 25%, or €5m to reach nearly €25m.
We now examine any significant changes to planned expenditure within the eight Service Divisions. Spending in some divisions will be cut, due to the challenging economic and financial background. In the City Council Budget, only the Housing and Building division will benefit from any significant increase. Planned spending rises by nearly 16%, or €6m, to €39.1m. The pandemic causes planned expenditure in the Recreation & Amenity division to fall by 18% or almost by €4m. In the County Council Budget, although there are not any cuts at divisional level, the only significant increases in expenditure are in the Roads, Transport & Safety and Development Management divisions.
December 2020 The local authority budget process
During the months of November or December each year, local governments in Ireland adopt and publish their budget for the following year. The budget covers current revenue and current expenditure. Legislation requires each local authority to prepare an annual budget, in advance of the start of the forthcoming year. This short blog examines the key features and stages of the budgetary process.
Before the draft budget is prepared, the council must decide whether to vary the Local Property Tax (LPT) rate. Local authorities can implement a Local Adjustment Factor of +/- 15%. The first stage of this process is inviting public consultation on possible variations of the LPT rate. This consultation period lasts for 30 days. Then the council prepares a report for the elected members, on the results of the consultation, the financial position of the council, and the impacts of any possible variation on households and the local economy. The meeting to decide on any variation typically happens during September, as the Chief Executive must notify the Minister and the Revenue Commissioners of the decision by the end of that month. The decision to vary the LPT rate is a reserved function of the elected members.
The preparation of the budget is a phased process, and it is the responsibility of the Chief Executive. The Department decides the format of the budget, and all local authorities use the same format. During the drafting process, the Chief Executive meets with the various divisions/units within the authority to discuss their plans for current and capital expenditure. The Local Government Act 2001 requires the Chief Executive to consult with the Corporate Policy Group of the local authority. This committee consists of the Cathaoirleach/Mayor and the chairpersons of the Strategic Policy Committees. The Chief Executive also consults with the councillors who have formed a majority group on the council of elected members. Another input into this bargaining process are the amounts of specific purpose grants and Local Property Tax receipts that will be allocated by central government to the local authority during the following year.
The Local Government Act 2014 adds a requirement that the Chief Executive prepare a draft budgetary plan for each municipal district (where applicable), and submit this for consideration by the elected members of each municipal district. The Chief Executive is required to consider the resource need and population of each municipal district. It is a reserved function of the elected municipal district members to make amendments to this draft budget, and following this, they by resolution adopt the municipal district budget. The Chief Executive must take account of the adopted budgets at the municipal district level when preparing the council-wide draft budget.
The next stage in the process is to hold the annual budget meeting of the council, which typically occurs during November. At least seven days in advance of the meeting, the draft budget must be presented to the members of the council, and made available to the public. At the meeting, the elected members must make several decisions. First, they may amend the budget, and after any amendments, adopt the budget. The law requires that the budget must be balanced (a local fiscal rule!), so any changes in expenditure must be matched with changes to revenues. A second decision is to set the Annual Rate on Valuation (ARV), which is the tax rate levied on commercial and industrial properties. The ARV is calculated as the ratio of the Rates to be levied to the Net Effective Valuation (i.e. the Rates base), with the Rates derived as the balancing item between estimated expenditure and all non-Rates estimated income. The total estimated expenditure is spending on all the eight service divisions, whereas the non-Rates income is the total of revenue from the LPT (including an equalisation payment, if applicable), charges on goods and services, and central government grants.
Third, the Local Government Act 2014 gives elected members the power to vary the level of Rates refunds paid on vacant properties, and to vary the refund across different local electoral areas. If the owner/landlord of the commercial property can show that the premises is vacant due to a genuine reason (inability to find a tenant, undergoing repairs, preparing for re-development), then the local authority may pay a rebate to the eligible person. For example, in 2020 in Galway City Council, landlords are liable for 63.5% of the Rates, while in Offaly County Council ratepayers are given a 100% rebate.
Once these decisions are made, and the budget is approved, the adopted version is made available to the public, and submitted to the Department of Housing, Local Government and Heritage and the Department of Public Expenditure and Reform by the end of December. Subsequently, the Department compile the data from the 31 adopted budgets, and publish a consolidated budget, with tables showing trends in income and expenditure, and analysis of income and expenditure by service division.
November 2020 How local a tax is the LPT?
The Local Property Tax (LPT) came into effect in 2013, arising from the Finance (Local Property Tax) Act 2012. It is a tax assigned to local authorities in that the LPT receipts are designated for local government rather than for the central Exchequer. However, what constitutes a local tax, and does the LPT fit the criteria for such a tax?
We know it was central government that introduced the LPT as a way to broaden the tax base arising from the 2008/09 economic crash and its aftermath. It was designed by an Interdepartmental Group on Property Tax, which recommended residential properties as the tax base and 0.18% as the tax rate, with a higher rate of 0.25% on any portion over €1m. It is the Revenue Commissioners that is responsible for its collection. Given all this, what makes it a local tax? A local tax is traditionally defined as a tax where the local government has rate-setting powers. From 2015 onwards, a ‘Local Adjustment Factor’ (LAF) applied, where local authorities have the power to vary the basic rate, annually by +/- 15%. Applied at the margin, and although 20% of the receipts are pooled into an equalisation fund for distribution to the financially weaker councils, these rate-setting powers are the critical feature that make the LPT a local tax.
Since the introduction of the LAF, clear patterns have emerged with respect to the use of these local tax powers. One, over time, more local authorities are using these powers (or reserved functions, as these powers rest with the local councillors rather than with the Chief Executive or management). Although the number of councils opting to vary the rate did decline in the first three years (from 14 local councils in 2015 to 8 local councils in 2017), it has increased to 23 councils in 2020 and to 25 councils by 2021.
Two, there is a trend away from a reduction in the rate which was common in earlier years (in 2015 all 14 councils cut the rate, with almost half this number applying the maximum reduction of 15%) to an increase in the rate, with for example, 22 (of the 25) councils in 2021 increasing the rate (of which, 12 voted to apply the maximum increase of 15%). Three, in euro terms, the net change in annual LPT receipts due to the application of the LAF has declined over the years, from a peak of over -€43m in 2015 to +€2.8m in 2021.
Four, the Dublin councils have cut the LPT every year since 2015 and by the maximum of 15%, with the exception of Dun Laoghaire-Rathdown County Council for 2021 (no change in the basic rate) and Fingal County Council for the years 2018-2021 when councillors voted for a smaller 10% annual reduction. These reductions amount to income foregone of almost €200m since 2015, at a time when local public services (and especially local authority housing) were under significant pressure.
This has been exacerbated by the 2020 coronavirus crisis, and the subsequent downturn in economic activity. Although the decision by central government to waive commercial rates has been offset by compensation payments to local authorities, other sources of local authority income from charges and fees will be lower in 2020 due to the suppressed levels of economic activity and household incomes arising from the lockdown and public health restrictions.
With LPT rates for next year already decided, attention now turns to the 2021 annual budget meetings this November, and the local councillors’ other significant budgetary power, i.e. setting the commercial rates ARV (Annual Rate on Valuation). Rates income is used as a balancing item to equate budgeted expenditure with budgeted income, where the other sources of revenue are income from local charges and fees, central government grants (specific-purpose and equalisation transfers) and locally-retained LPT receipts. Commonly known in economics as a fiscal rule, this statutory requirement to adopt a balanced budget may see increases in the ARVs for 2021, at a time when many local businesses face enormous challenges as public health restrictions continue.
What we can say for certain is that the local authority adopted budgets for 2021 will look very different to the 2020 budgets adopted less than a year ago. Local councils may be no different than central government in future years when taxes – local and central – may have to be increased to pay for higher levels of spending and borrowing. Further annual increases in the LPT rate levied by local authorities are likely. Given these changed circumstances what remains to be seen is whether the four Dublin councils will persist with the annual reduction in the LPT rate, or will financial and budgetary considerations result in a change in LPT policy. Whatever the decision, it should be determined by local choices, characteristics and conditions, or expressed in another way, preferences, profile and place. After all, it is meant to be a local tax!
October 2020 What reforms of the LPT are needed?
In September the Local Property Tax (LPT) was in the news, again. The Minister for Finance announced the deferral of the revaluation date (for a third time) for the LPT and by doing so, effectively granting owners of residential properties a tax break while depriving local authorities of much needed income. Secondly, because local authorities are required by end September every year to inform Revenue of their local LPT rate for the next financial year, we learnt of the LPT variations for 2021. Although the majority of local authorities opted to increase the LPT rate, Dublin City Council, Fingal County Council and South Dublin County Council voted to continue the rate reduction, despite the disproportionate benefit to owners of more valuable properties and the precarious financial position of local authority budgets arising from the current economic crisis.
The purpose of this blog is to outline the background to the LPT, its successes but also the urgent reforms needed to prevent a possible repeat of the past when similar residential property taxes were abolished (remember domestic rates, the Residential Property Tax, and the Non-Principal Private Residence charge!). From a public policy perspective, our concern is for the long term integrity and sustainability of the LPT, and a fear that the LPT has been undermined by the failure of successive governments to update it and implement (some of) the recommendations of commissioned reviews into the LPT and its operations (including the 2015 Thornhill Review and the 2019 Interdepartmental Group Review).
As economists consistently argue, property taxes are considered to be among the least bad taxes. When considered on efficiency or equity and distributional grounds, property taxes score well, distorting economic activity and behaviour less than other taxes. Property taxes are also difficult to evade, and if designed properly can have a positive impact on land usage and urban planning. Despite this, property taxes are often rated by taxpayers as the most unpopular tax, due possibly to its salient feature but also the form of payment i.e. the annual cheque in the post, or more likely these days, the single online payment.
Following the economic crash of the late 2000s when the Irish government was heavily reliant on transient taxes based on cyclical economic conditions, the EU/IMF Programme of Financial Support recommended a widening of the tax base. The design of a local property tax report by the Interdepartmental Group on Property Tax included 18 key recommendations, and ultimately led to the introduction of the LPT in 2013. Aside from broadening the tax base, the LPT is a tax on wealth (in the form of property) and provides a stable source of income – not to mention accountability – for local government. It is a self-assessed recurring tax on owners of residential properties, based on market value, as of 1 May 2013, which, fortunately or unfortunately (depending on whether you are a taxpayer or a revenue-raising government official) coincided with the trough in property prices in Ireland.
Due to the increase in property prices since 2013, government policy with respect to any LPT revaluation has been to ensure ‘relative stability’ by limiting any increase in LPT liabilities. The 2020 Programme for Government commits to no increase in the LPT for ‘most homeowners’. While understandable from a political economy perspective, we believe this focus on the LPT revaluation process and limiting the LPT yield has been excessive, and at the cost of other considerations.
Equally pressing concerns from a design and operational perspective are the following three issues, namely the tax base and related exemptions, deferrals and reliefs; the 80% retained / 20% pooled split and the distributional impact of the equalisation transfers funded largely from the 20% fund; and, the circa €500m yield relative to the €1.5bn yield from commercial rates, where the latter is also a tax on property but likewise a tax on business. Viewed as a disproportionate burden on commercial properties, this is at a time when many SMEs in the retail, hospitality and tourism sectors are struggling to survive due to the covid-19 pandemic and the subsequent downturn in economic activity.
Given Ireland’s difficult history with property and residential property taxes, the LPT has been a huge success (water charges is a different story!). From its initial design and assessment, to its operation and local variation in rates, to its compliance and collection, the Department of Finance and the Revenue Commissioners deserve praise and admiration in implementing a new tax, and a local property tax at that! All the more reason to protect the legitimacy and integrity of the LPT, surely.
As a share of total tax revenue, LPT receipts are less than one percent, and dwindling. Given the least harmful nature of the tax and the modest rate and yield by international standards, we believe that there is potential for an increase in revenue from the LPT. Although property prices have increased since 2013, so also has taxpayers’ ability to pay as wages and household incomes have also increased, as recently acknowledged by the Oireachtas Committee on Budgetary Oversight.
Here we outline our recommendations, based on what we see are the outstanding problems relating to the name, the valuation process, revenue retention, the base and the local variation in the rate. We begin with a name change that better reflects the nature of the tax. LPT is a tax assigned to local government. Property taxes are viewed as the best local tax as property is immobile and largely inelastic, with values less volatile and sensitive to the economic cycle. Since its introduction, however, much of the focus and debate has been on the tax base i.e. residential properties. In order to stress the importance of the LPT as a local authority tax that funds local authority services, we recommend a change in the name to the Local Council Tax (LCT), as common in England and Scotland and as recommended in recent commissioned reports. Although may be one of perception, we believe a name change can lead to more taxpayers recognising the important link between local taxes paid and local services rendered, resulting in a greater tolerance of the tax and future tax increases, when levied at the local level.
On the issue of revaluation, we recommend that government commit to a valuation date and regular periodic revaluations thereafter (every 3-5 years), to ensure future LPT payments accurately reflect the value of the property. As we know 2013 valuations are out of date, and the longer the revaluation is deferred, the more politically difficult it will be to revalue. We know this from our nearest neighbour where in England council tax is based on April 1991 property values! Whenever it does take place, the revaluation date and the Local Adjustment Factor (LAF) notification should be timed to suit the annual local authority budgeting cycle.
Regarding receipts, we recommend that local authorities retain 100 per cent of revenues raised in their local administrative area, with central government funding the necessary equalisation transfers to the local authorities with smaller tax bases. This will compensate for the reduction in local government funding that took place when general-purpose grants were initially cut and then abolished (and replaced with the LPT) and, in the future, could fund a stronger and more decentralised system of local government in Ireland with greater functional responsibilities. Returning to equalisation, this vertical system will replace the current horizontal model where Dublin and other largely urban councils are partly funding financially weaker councils, and with a fiscal equalisation system that is not sufficiently large, objective or transparent in its allocations.
As for the base, we recommend its update, with exemptions kept to a minimum, based on sound public policy reasoning and regularly reviewed. There should be automatic annual changes in the base rate in line with a suitable benchmark e.g. inflation rates, population changes, or local authority expenditure increases.
Finally, we reject the call that local authorities should be limited to upward only adjustments in the base rate. Although sensible from a fiscal discipline perspective, this is outweighed by the loss in autonomy to local authorities. If we believe in fiscal decentralisation and empowering councils to make local decisions that best reflect local preferences and circumstances, then local councils should have rate-setting powers, both to increase rates but also to lower rates. Whereas we might not agree with the decision by the Dublin councils to cut the LPT in the last seven years (estimated at almost €200m in revenue foregone), the role of local government is not only as a provider of services but also as an instrument of local democracy. We urge central government to update the LPT and make the necessary changes to ensure its long-term acceptance and survival. A bit like democratic governments, although not ‘perfect or all-wise’, the alternative policy options are worse.
September 2020 What is the international evidence of the impact of COVID-19 on subnational finance?
During the summer months a number of reports were published on the financial impact of COVID-19 on the public finances of local and regional authorities. Among others, it includes publications by the OECD on the territorial impacts across levels of government and studies by the Institute for Fiscal Studies on the financial risk and resilience of English local councils, and the impact on council budgets in England of the COVID-19 crisis. With the relevant links listed at the end of this blog, we hereby provide a short summary of these reports.
The impact of the COVID-19 pandemic and subsequent lockdown on subnational finance is not straightforward. It varies across space and time, and is likely to be different than the impact on central government finance. This is because subnational governments are more vulnerable to liquidity crises as they have limited tax sources and are dependent on intergovernmental transfers, have little discretion over spending and, at same time, are often responsible for the delivery of essential and costly public services. The financial impact of COVID-19 on subnational governments will differ, depending on a number of factors. Given the nature of this public health crisis, urban areas with high population densities, high levels of deprivation and heavily reliant on retail, hospitality and tourism are more affected.
Aside from the general economic profile and resilience of the local economy, what matters for the impact of the COVID-19 crisis on subnational finance are the degree of fiscal decentralisation and the mix of revenue sources. For example, the greater the subnational spending responsibilities and the more reliant subnational governments are on volatile revenue sources (taxes on income rather than taxes on property, for example), the greater the impact of COVID-19 on subnational public finance.
With many subnational governments responsible for health & social care and welfare & social protection, spending by local and regional governments has increased as a result of the pandemic and the subsequent economic downturn. On the revenue side, subnational governments that are more reliant on income sources that are sensitive to economic fluctuations and current economic activity will experience a larger fall in income. Tax revenues will fall, as will income from charges and fees on goods and services because of the contraction in local economic activity. The impact on transfers will depend on a number of factors, including the initial fiscal health of governments, the response of central government to the crisis, and the design features of intergovernmental transfers. Albeit somewhat different this time, this scissors effect on subnational finance of an increase in spending combined with a reduction in income was evident in the last economic and fiscal crisis that followed the 2008 financial crash.
In terms of the impact over time, aside from the short-terms effects outlined above, there are likely to be medium and long-term impacts on subnational finance arising from COVID-19 and the recession that follows. As subnational government revenues are often based on previous year’s activity, there will be a lag effect, with falls (and in some cases of greater magnitude than current reductions) in local government income materialising in 2021 and beyond. Of course, it is early days yet and any forecasts of cost increases, income reductions or deteriorations in budget balances or levels of debt for 2020 and beyond should be treated with caution.
This is what the Institute for Fiscal Studies report into COVID-19 and English council funding does when, based on councils’ own assumptions and estimates, it analyses expenditure pressures and non-tax income shortfalls for 2020/21, but reminds readers of the potential significant margins of error. The estimates can be found in the IFS publications below. Aside from the conclusion that the impact is uneven across English local councils, the report concludes that English councils will have an estimated funding shortfall of about £2bn in 2020/21, even allowing for the financial supports from central government. To avoid in-year cutbacks to services and a repeat of the austerity years that followed the last crisis, councils can use reserves to offset these shortfalls but the amounts are limited, can only be a short-term solution, and levels vary significantly across councils, as do the degrees of financial risk and resilience.
Whether it is English councils or continental European-style municipalities, the medium term outlook may include, as happened in the last fiscal crisis, short-sighted cuts in public investment and/or pre-mature or overly aggressive fiscal consolidation plans which will only aggravate current and future economic conditions. Hopefully, the lessons that were learnt in relation to fiscal policy – both national and subnational – during the last economic crisis will not be forgotten. In the meantime, central governments in OECD countries continue to support the finances of subnational governments, by means of an easing of spending responsibilities, increased transfers, compensation measures, additional credit lines, loans and guarantees, temporary lifting of fiscal rules, greater access to external financing (i.e. debt) and specific supports to the most severely affected local councils. A co-ordinated policy response between different levels of government is also necessary to ensure the long-term sustainability of subnational finance.
August 2020 Improving the system of fiscal equalisation in Ireland’s local government?
Fiscal equalisation is a key element of a country’s intergovernmental fiscal arrangements where functions and funding are decentralised to subnational government. Despite Ireland’s highly centralised system of public administration, fiscal disparities exist between local authorities. In general, fiscal disparities between local councils are due to differences in revenues arising from variations in tax and non-tax bases, and differences in expenditures due to variations in spending needs or costs of public service provision. Equalisation transfers or grants are used to reduce these horizontal fiscal imbalances, so that fiscal equity can be achieved whereby citizens are not disadvantaged in their access to public services by their place or region of residency, i.e. subject to local preferences, equals should be treated equally.
A well-designed system of equalisation transfers depends on two critical decisions, namely the size and the allocation of the distributional pool. Currently, the equalisation fund is financed from a pre-determined share of the local property tax (LPT) and, less so, a contribution from the central Exchequer. The distribution of the fund is determined by the shortfall between the LPT retained locally and the general purpose grant payment of 2014, so as to ensure that no local authority is worse off from the LPT than its general purpose grant baseline.
In 2020, the equalisation fund was €135m, with 20 (of a total of 31) local authorities in receipt of an equalisation payment, and with just four local councils (Tipperary €16.5m, Donegal €16.3m, Mayo €11.5m and Waterford €11.2m) accounting for over 40% of the total. In the case of small rural councils with limited economic activity and revenue bases, the equalisation grant accounts for 10-15% of council income, and close to one fifth in the case of Leitrim County Council.
Equalisation transfers can be funded from central government (vertical equalisation) or from the wealthier local authorities (horizontal equalisation). Whichever of these mechanisms is used, a formula-based methodology to determine the size and distribution of the equalisation transfers is preferred, on the grounds of transparency and objectivity. In our research, we construct a model of fiscal equalisation that is consistent with international best practice based on quantifiable, predictable, and equitable criteria, but like all fiscal equalisation programmes worldwide, tailored to the specific circumstances of the home country.
As the objective of our model is revenue equalisation, we use the concept of fiscal capacity which is defined as the potential ability of local authorities to raise own-source revenues. From a number of alternative approaches, we use the multi-dimensional Representative Revenue System (RRS) framework to measure this local fiscal capacity or revenue-raising potential, and in turn, equalisation transfers. This requires data on own-source revenue bases (for commercial rates, LPT, fees and charges) and national average effective rates, defined as total revenue divided by the national revenue base. Using typical revenue categories, this fiscal capacity estimate is compared to a norm or common standard, defined here as the national average capacity level. Councils with below average fiscal capacity receive an equalisation grant, equal to the euro difference between the individual fiscal capacity estimate and the national standard.
Scaled by local authority population, the sum of these formula-determined equalisation amounts equals the total equalisation pool. In our simulations (for 2017 but similar in other years), the equalisation fund is €210m, which is larger than the existing pool but smaller than equalisation funds in many other OECD countries. As for the individual council allocations, although it is roughly the same local authorities (i.e. councils with weak economic bases) than receive equalisation transfers under the two models, the actual euro amounts differ.
Given the redistributive nature of fiscal equalisation, undoubtedly there will be winners and losers. Aside from central government which is the big ‘loser’ (in pure financial terms) as it funds this new equalisation scheme, in absolute euro amounts the big winners are Galway, Meath, Wexford and Laois County Councils. As for the more difficult and sensitive issue of the losers, different policy responses will be required to ensure fiscally prudent balanced budgets at the local level. This may include higher local property taxes levied by individual councils or, in the case of councils with the smallest economic bases and/or in a difficult financial position, temporary compensation payments from central government during the transition to this new and improved model of fiscal equalisation.
July 2020 What’s in the new Programme for Government on local government finance?
A new Government was formed on 27 June 2020, about 20 weeks after the general election on 8 February. This followed negotiations by the three parties Fianna Fáil, Fine Gael, and the Green Party. The negotiations led to an agreement on a Programme for Government (PfG) “Our Shared Future”
Here we will analyse the plans for local government finance in the PfG. We start with commercial rates, an annual property tax paid by occupiers of commercial properties. Due to the Covid-19 pandemic, and the associated economic crisis, the Government initially (20 Mar 2020) decided to defer rates payments due for the most immediately impacted businesses – primarily in the retail, hospitality, leisure and childcare sectors, for three months, until end-May. Subsequently, the Government decided that a waiver of commercial rates will apply to all businesses that have been forced to close due to public health requirements from 27 March 2020, for a three-month period. The cost, expected to be €260m, will be met by the Exchequer. The PfG states that the expected July Jobs Initiative will outline how commercial rates will be treated for the remainder of 2020. There is also a commitment to examine ways to further streamline the commercial rates system post Covid-19, although no further details are provided in the programme.
Next, we discuss reforms to the Local Property Tax (LPT), listed under the PfG’s Public Finance and Taxation heading. Several reviews of the LPT have been undertaken since its introduction in 2013. These analyse possible changes to the tax, and any revaluations, in light of the very strong property price increases since 2014. The Minister for Finance has postponed the revaluation process twice, and the next revaluation date is scheduled for 1 November 2020. The PfG makes three commitments: (1) to bring forward legislation for the LPT on the basis of fairness and to ensure that most homeowners will face no increase (2) to apply LPT to new homes, which are currently exempt, and (3) to retain 100% of the LPT receipts locally, rather than the current 80%. The third proposal will require adjustments to the fiscal equalisation scheme, which currently is mainly financed by 20% of each local authorities’ LPT receipts. The PfG promises to establish a Commission on Welfare and Taxation, which may review the operation of the LPT.
The PfG contains two proposals to improve reporting and accountability. First, a requirement that each council publishes an annual statement of accounts to all homeowners and ratepayers, giving a breakdown of how revenue was collected and how it was spent. Currently, councils publish an Adopted Budget during December or January (as the budgetary process at local government level must be completed by the end of year prior to the financial year to which the budget relates), and an audited Annual Financial Statement usually about six to nine months after the end of the financial year. These reports contain tables with breakdowns of income source and expenditure function. However, the presentation of the data is not that user-friendly, compared to this website.
Second, a proposal to review and modernise key performance indicators for local government, learning from metrics used in other jurisdictions. Currently, the National Oversight and Audit Commission (NOAC) publishes Performance Indicator reports, Public Spending Code reports, Local Authority Satisfaction Surveys and various other reports. In the latest Performance Indicator report (for 2018), there were 37 performance indicators, grouped into 11 different categories related mainly to local authority functions and activities. One possible comparator is Scotland where its Local Government Benchmarking Framework (LGBF) provides a high-level benchmarking tool designed to support senior management teams and elected members. It provides comparable data as a catalyst for improving services, targeting resources to areas of greatest impact and enhancing public accountability.
Finally, the PfG commits to encouraging local authorities to bring forward pilot participatory budgeting projects. Participatory budgeting (PB) is one of several possible methods to enable more citizen engagement in the local authority budgetary processes. PB is a fiscal decision-making mechanism, which involves citizens in the discussion of municipal budgets and/or the allocation of municipal funding. Different models of PB are possible, ranging from budget surveys to deliberation of entire budgets. South Dublin County Council (SDCC) piloted the first ever PB process in Ireland in 2017, allocating €300,000 to the Lucan electoral area. At the project proposal stage, 160 ideas were generated through a combination of workshops and online submissions. These were eventually whittled down to 17 projects that went out for ballot. Over 2,500 ballots were cast online and in person, and eight winning projects selected. For more information including the 2019 details, see https://haveyoursay.southdublin.ie/
The PfG contains many other proposals relating to local government, mostly focussed on: directly-elected mayors, training and support for elected councillors, and improvements to environmental and climate change policies, reflecting the Green Party’s influence. For example, there is an emphasis on a ‘Town Centres First’ type approach to regenerate our towns and villages. Overall, although there is a commitment to making local government stronger, there are no specific plans included in the PfG to devolve greater spending and taxing powers to local councils. In the absence of any significant expenditure and revenue reassignment from central to local government, it is difficult to achieve the mission of a stronger, more accountable and more responsive local government as set out in the PfG.
The Great Lockdown of 2020 has had a devastating impact on many sectors of the economy. Two such sectors are businesses and our local councils. The forced shutdown of non-essential services has led to many SMEs struggling to pay commercial rates. In response, the central government introduced a three-month rates waiver for those businesses affected by the lockdown. At the same time it promised to compensate local councils for this loss of income from non-payment of rates, estimated at €260m. There is also less income accruing to local authorities from charges on services such as car parking and planning applications due to the contraction in economic activity.
Given that this economic recession is likely to be severe, what is needed in the short-term are contemporaneous changes in taxes on local businesses and revenues of local authorities that will help both the commercial and local government sectors. One such proposal is a reform of the motor vehicle tax (MVT) and the local property tax (LPT). Changes to the MVT and the LPT as outlined below should guarantee local authorities a steady source of income in the difficult times ahead, while, simultaneously, assist local businesses and SMEs by reducing their annual rates liability.
Before the local government reforms and the introduction of the LPT in the mid 2010s, the MVT was assigned to local rather than central government. It was paid into the Local Government Fund, which, in turn, allocated monies to local authorities in the form of central government grants, both general-purpose and also specific-purpose grants for non-national roads. MVT amounts were about €1bn, per annum. The introduction of the LPT and other changes to local government income resulted in a new and improved model of local government finance.
Currently, MVT is collected by the motor tax office of the local authorities but since 2018 it has been paid into the central Exchequer for central government spending. As for the LPT, amounting to annual receipts of just less than €500m, 80% is retained in the administrative area from where it is collected and the remaining 20% is pooled and allocated to those local authorities with weaker property bases. The distribution is based on historical amounts received in 2014, called the baseline which is the minimum level of funding for each local authority as determined by the Department of Housing, Planning and Local Government.
Our proposal begins with the MVT, and receipts of €964m in 2019. Rather than assign this revenue source to one level of government, our proposal is to share the yield between central and local government, on a pre-determined basis. Revenue sharing arrangements between different tiers of government are not uncommon in other jurisdictions. Revenue sharing of tax receipts on ownership of vehicles is also not uncommon (technically, now it bears more resemblance to a grant than a local tax but let’s leave that aside!).
Given the nature of motor vehicles, it is not unreasonable for a certain share of the revenue from the tax levied on motor vehicle ownership to accrue to the local authority where the owner of the vehicle resides. A central feature of any good system of local government is the matching or benefit principle i.e. linking the taxes paid with the benefits received. In this case the motor tax accrues to local authorities, and, in turn, used for the delivery of local services including the maintenance of local and regional roads, traffic management, road safety, street cleaning, etc.
As for the actual share, this is a decision for central government. In our calculations we take a modest 25%/75% share, with 25% of MVT receipts accruing to local government on a derivation basis i.e. shared in proportion to the revenue collected in each local authority. With a 25% share to local government, amounting to €241m in 2019, this would have translated into a 15-17% reduction in commercial rates income needed by local authorities to balance their budgets.
In terms of the Annual Rate on Valuation (ARV) which when combined with the rateable valuation of a property determines the annual ratepayer’s liability, this would amount to a 20-25% average reduction in the ARV. While urban councils, in Dublin and Cork for example, that depend relatively more on rates for their annual income could see a rate cut of, say 10-15%, some smaller rural councils could implement a reduction in the ARV of up to 30%, while at the same time, continue to maintain local services and manage the local public finances. Whatever the precise cut in the ARV, it amounts to a significant and permanent reduction in the annual rates bills for businesses and SMEs with commercial and industrial properties.
As for the LPT, our proposal involves a change in how the LPT funds local government. Here, the proposal is for a redesign of the LPT that is, on the one hand, simpler and, on the other hand, more transparent. We propose to replace the current 80%/20% split with a 100% retention model where local councils retain the full 100% of LPT receipts from their administrative area. To offset the widening horizontal fiscal imbalances that this will inevitably produce, we propose that central government funds the so-called equalisation or top-up grants. This is the case in many other unitary countries.
In doing so, by separating LPT from equalisation we achieve a less complicated model of local taxation. In addition, the use of a new equalisation formula that is both measurable and objective achieves greater transparency, with more equitable fiscal outcomes across the local authorities. A common methodology used worldwide to distribute fiscal equalisation grants across local councils is the concept of local fiscal capacity and a representative revenue system. In essence, it means allocating equalisation funds based on estimates of revenue-raising capacity or potential revenue, rather than using actual revenue which can have potentially strong disincentive effects on tax collection and local tax bases.
Using this methodology, the formula-determined equalisation fund required for Ireland’s local authorities is about €200m per annum, according to our estimates. Similar to the MVT proposal, the combination of the 100% LPT retained with this new vertical equalisation fund would result in less commercial rates income needed (initially budgeted at over €1.65bn for 2020) to balance annual local authority revenue and spending. In turn, the average ARV would be lower but with a very wide variation across the 31 local authorities, with some big winners and also a small number of losers. Careful consideration needs to be given to these distributional changes, and how the losing councils can be compensated during a just transition phase.
So, as economists like to warn that there is no such thing as a free lunch, what is the catch with this proposal? The big loser is the central government, as it would have to sacrifice 25% of the annual MVT and/or over €200m gross for LPT and equalisation purposes (net figure is less, as it already contributes an annual sum to fund the distributional pool for financially weaker local authorities). Taking the MVT and LPT changes together, the total annual cost of over €400m to the central Exchequer needs to be weighed up against the combined benefits of a business sector and a model of local government finance that are more stable and sustainable, in the current business environment that is unprecedented.
Although reluctant to use the word desperate, uncertain times call for radical measures, such as the changes to MVT and LPT outlined above. A new government might wish to consider this limited but worthwhile package of tax policy measures aimed at the economic recovery, with potential local and national benefits for our scarred but resilient economy.
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.