LOCAL property taxes, linked to corresponding reductions in income tax, would be one of the most efficient ways of generating substantial funds to finance local government, according to a report published yesterday.
The KPMG report - delivered to the Minister for the Environment, Mr Howlin, a month ago - also suggests a local income tax as an alternative, saying it could raise £314 million a year towards the cost of running local government.
Either way, if such proposals were to gain public acceptance, the authors say national income tax could be reduced by up to 3.2p in the pound at the standard rate, or 1p in the top rate plus 2.7p in the standard rate.
Other ways of raising money suggested by the report include increasing existing local charges, extending them to areas (such as Dublin and Limerick) where they do not apply at present, and introducing new charges for local authority services.
A guiding principle in the report is that, if local government is to be effective, revenue should be raised locally, with councillors accountable for how it is spent. "True accountability will exist only when the local electorate is paying for services as opposed to merely demanding them."
However, though local accountability was important, it says the right of central government to concern itself with the level of local government spending "must be accepted", because it affected the overall burden of taxation and could have implications for the Government's economic policies.
With current local government expenditure now standing at £1.22 billion annually, any funding system must be capable of generating significant revenues. It should also be easy to understand, clear and unambiguous, cost effective to collect, and based on equity, or "ability to pay".
The report emphasises that the system should be underpinned by "a broad level of consensus", that it should not have the effect of constraining enterprise, employment or work and that it should be "transparent".
Referring to the current funding system, the authors list its "strengths" as follows: "It is in existence, it works, it is largely accepted though there is dissatisfaction in relation to domestic charges and commercial rates (and) alternatives pose certain dilemmas."
But it also had many weaknesses, notably the limited local discretion local councils' enjoy. It had also led to "real cuts" in the Government's rate support grant and, as a result, a search by the local authorities for increased yields from commercial rates and service charges.
The estimated income from commercial rates rose from £228 million in 1989 to £323 million last year, more than double the rate of inflation. To make it more equitable, the authors recommend widening its base to include some 14,000 bed and breakfast establishments as well as all non residential farm buildings.
Revenue from charges for water, refuse collection and other services now amount to almost £87 million, accounting for almost 33 per cent of revenue, compared to 25.6 per cent in 1987. But the report comes out against widespread metering of water, because this would cost £34 million per annum.
It concedes that local charges are perceived as a form of double taxation, but suggests that personal income taxes would be correspondingly higher if these charges did not exist. "Any new financing structure will have to demonstrate clearly that no double charging is actually taking place," it says.
Dealing with the potential of a property tax to generate "substantial revenues" for local authorities, the report says it could be so designed to have "relatively little impact" on most taxpayers, thus avoiding the negative reaction to the existing Residential Property Tax.
It points out that the existing yield of £72 million from property taxes on private dwellings (stamp duties and RPT) is under half the cost of mortgage interest relief and new house grants. By comparison, it has been estimated that a local property tax would raise between £275 million and £500 million.
To overcome the problem that RPT is essentially a "Dublin tax", simply because property values in the capital tend to be higher, the report suggests that a local property tax could be levied on the basis of the size of a house and/or its rebuilding cost, using a self assessment system.
"We regard it as inevitable that any form of local authority funding that is linked to property will be termed rates by the back door," the authors say.
The alternative of a local income tax, though rejected by a number of previous studies, had the merit of ensuring that low earning households would pay less, while those with two or more income earners would pay correspondingly more. However, though easier to collect, it would not widen the overall tax base.
In its review of local government funding elsewhere in Europe, the report said the general trend had been one of reductions in central government grants and increased reliance on local taxes and charges. "This is consistent with greater delegation of powers and the desire for more local accountability."
