After months of study and yet another report on the local property tax, the Government decided this week to kick a decision on the future of the tax forward another year. This means property owners will pay the same in 2020 as they did in 2013, the year the tax was introduced, despite soaring house prices in the meantime. So will we ever see our bills rising? And if so, who is likely to be hit? There are some clear pointers in the latest review from the Department of Finance, as we will look at in detail below.
It is clear from the review group report looking at reform options that it is impossible to both protect existing revenue and ensure there are no losers from a reform of the tax – particularly in Dublin, where house prices are generally higher. Even in the option involving least change, more than 250,000 homeowners would face higher bills, including a group of 25,000-30,000 in lower-priced homes mainly in rural Ireland, plus many in more expensive properties in Dublin.
1. Why have a property tax?
The local property tax (LPT) was introduced as a new source of revenue in 2013 at a time when taxes had collapsed in the wake of the economic crash. It was introduced as part of the EU/IMF rescue programme, as a new, relatively stable source of revenue and one used in many other countries. Economists see it as less damaging to growth and job creation than most other taxes, particularly income tax.
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One of the reasons we ran into trouble in the crash is that our tax base was too narrow – relying on income tax and tax on property activity such as stamp duty – and the local property tax was a way of widening the base. Property taxes are also stable sources of revenue as they are not reliant on transactions, like stamp duty or VAT on new houses, or on economic activity, like corporation tax or income tax. In the Irish case it was also seen as a stable revenue base for local authorities.
As better off people tend to own more expensive houses, property taxes are generally seen as progressive. However there is debate about the impact on people with high value houses but low incomes – and on the Dublin versus the rest issue, with higher bills paid in the capital due to higher house prices.
Nonetheless, unlike the water charges, the local property tax became an established part of our tax structure. The problem has been that house prices have gone only one way since its introduction – upwards. And in the wake of the water charges row, this Government and its predecessor have not grasped the nettle of what to do with the tax in future. Former finance minister Michael Noonan kicked the decision forward in 2016 to this year, meaning houses were due to be revalued this November and new tax rates applied from next year. However, Minister for Finance Paschal Donohoe has put off any decision for another year.
2. What's the problem?
The core of the problem is that if the Government did nothing and house prices were revalued on schedule in November and the new tax applied from 2020, householders would face very sharp increases in their LPT bills. The yield from the tax would increase, the department estimates, from €482 million last year to €729 million in 2020, a rise of more than 50 per cent in the take. This increase is less than the 80 per cent rise in property prices since the tax came in. This is because the banding system for the tax – which applies on values up to €1 million – means the cost to householders only rises when the property moves up into a higher band.
Still, the increases would have been substantial, with more than half of homes moving up by three or more bands and 25 per cent by two bands. The numbers run in the department’s report showed that 27 per cent of properties would have faced an increase of between €101 and €200 in their average bill – a rise of just over 100 per cent on average from current levels – and 28 per cent would have faced a €201 to €300 increase. A significant number of people owning more expensive properties would have faced increases in the €300 to €500 a year range or in some cases more, a rise of close to 100 per cent on average in their current liabilities.
The Government has fallen over itself in recent months to assure us that this would not be allowed to happen. But the difficulty is constructing a way to avoid it. And the key issue is that whatever way you do this, bar engaging in some extraordinary complexity or accepting that you will collect a lot less tax, there will be winners and losers. The amounts involved would be a lot smaller than outlined above in a no-change situation. But the political risk was still seen as too great.
3. What are the solutions?
The first decision is whether the tax should remain based in some way on the price of the property. The next step is to decide how much money will be raised – and the target in the department’s report is taken at €500 million, just above current levels. Then you can set the tax rate based on current house prices to raise that targeted amount.
The different scenarios – bar one – looked at by the department all take roughly this approach. The rate is cut sharply and the bands remain. The final one – which could end up being chosen – takes the opposite approach and widens the bands.
The first scenario cuts the rate nationally from 0.18 per cent of the house value now to 0.114 per cent. The second scenario – along the lines of what was recommended in an earlier report written by former senior public servant Dr Don Thornhill – would oblige local authorities to raise roughly what they do now and set their own rate to do so – leading to rates between 0.085 per cent of the house value and 0.144 per cent. In a third scenario the rate is different in each LPT band, to try to minimise changes from the current position.
However, as the report makes clear, it is simply not possible – if house prices are the base – to devise a system which raises roughly the same amount of money while ensuring that absolutely nobody pays more.
For example, because of the way the bands work, taking the first option and just introducing one lower national rate of 0.114 per cent would lead to more increases, on average, for lower- and higher-priced houses and less for those in the middle. So homeowners in Dublin city would face a €170 rise on average, with an €89 rise in Galway, and €53 average annual rises in Leitrim, Roscommon and Longford, where prices are low.
On average the take would rise by €89, with more than eight out of 10 houses seeing some increase, reflecting the slight increase in the target yield and the fact that in some areas households currently benefit from reductions of up to 15 per cent, due to decisions taken by their local authorities. A lot of houses would face increases of about €110 a year.
The other options leave more households facing decreases or at worst small increases, but at the price of increasing complexity. One option would involve up to 620 different rates nationwide – with each local authority setting a rate for each different LPT rate band.
There is one final option which did get some favourable comment from the Minister. A system of widening the LPT bands by 80 per cent to account for the increase in house prices since 2013 – while leaving the rate unchanged – would mean the least change from current levels. It would leave 82 per cent of houses facing the same bill, of which the majority are outside Dublin. However, the rest face an increase, with 17.5 per cent moving up one band and the remaining 2.5 per cent facing higher increases.
There are two political problems, even here. One is that a group of houses currently in the lowest band would move higher, leading to a €135 rise for many who are low earners. These are mainly in rural Ireland and 25,000-30,000 households would be involved. The second is that the larger group hit – roughly 225,000 homes – would be generally higher value Dublin households moving up one band (€90 more per annum) or two bands (€180 extra).
It is clear that under any system which protects roughly the current amount collected, there will be losers. This is the political problem.
4. The exemptions and deferrals
Around 48,000 properties claimed exemptions in 2018 and few would argue with many of them, including houses in unfinished estates or those with pyrite. However, half the annual €49 million cost of exemptions is accounted for by those who bought their first homes in 2013, or those who have bought new homes since then from builders and developers. The department review group recommends that these two exemptions be ended, which would bring these people into the tax net for the first time. It also recommended that the current system of deferrals be largely continued. The most widely used is that those who earn less than €15,000 for a single person or €25,000 for a couple can defer their bills, as can those with a high mortgage burden and relatively low incomes. However, the bill is still due to be paid, with interest, often out of the proceeds when the property is sold.
While the deferrals will likely stay under any reform plan, the exemptions issue could be politically sensitive for the Government.
5. Who are the likely winners and losers?
Bills will remain as they are for 2020. It is impossible to tell for sure what will happen thereafter, as a general election is likely in the meantime. However if one of the reform plans outlined in the review is accepted, as looks likely, then there will be at least some households paying more. Broadly those most at risk are those whose house value as decleared for the tax in 2013 was close to the top of one of the bands – which are set at €50,000 gaps from €100,000 up to €1 million. Second, clearly you are at higher risk if your house value has risen by more than the average since 2013. And third, if your property has passed the €1 million barrier, you may get caught paying a higher rate of 0.25 per cent on any valye above this, depending on what reform plan is chosen.
The analysis in the report highlights two groups at risk. One is those where the rise in house values moves them up from band one – currently capped at a home value of €100,000 – to band two. This involves an additional payment of €135 a year. This is bigger than the €90 cap between other bands. In any of the scenarios examined, a minority of houses in this group lost out.
The second group at risk are those in more expensive properties, mainly in Dublin. Here valuation increases are less likely to be cancelled out by a lower rate or even a wider band. This is especially the case in parts of South Dublin and Dun Laoghaire Rathdown, where valuation increases have been particularly sharp in some cases.
In contrast, people in average value homes are more likely to face no change, or even in some cases a small reduction.
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The bottom line is that the Government will have to grasp the nettle, probably next year. The review group warned that further delays "may present risks to the long-term sustainability of the tax". The longer no change is made, the more current tax levels become divorced from what is meant to be the base of the tax– house values. This makes change more and more complicated and opens obvious anomalies. The Thornhill report and reports from the Parliamentary Budget Office and the Oireachtas Budgetary Oversight Committee all warned about the risk of constitutional challenge, as happened successfully in the 1970s, when a group of farmers successfully challenged the old agricultural rates system in the Supreme Court.
If not reformed, the tax will quickly turn into a kind of annual fixed charge on households, divorced from property prices. However, the fact that reform has already been left so long has made it difficult for the Government and opened up the risk of political controversy, notably in Dublin where bills are already higher. And so it decided to boot it all into touch until after the local and European elections and probably after the next general election.
