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NUI Galway on RTÉ Brainstorm: s it time to reset property taxes and commercial rates?
Author: Dr Gerard Turley, Economics
Opinion: as local authorities prepare their 2020 budgets, it may be time to examine if the local property tax and commercial rates system is fit for purpose
Local authorities around the country are currently discussing and adopting council budgets for 2020 at their annual budget meetings. Councils have already decided their 2020 Local Property Tax (LPT) rate and whether to adjust the basic rate up or down by 15%, resulting in higher or lower property tax bills for owners of residential properties. As for the other local tax, commercial rates, the Annual Rate on Valuation (ARV) will be agreed as part of the adopted budget process.
Both taxes have many features in common. They are both recurrent taxes on immovable property and are important sources of local government funding, with service charges and central government grants as the other revenue sources. Revaluations are not common, but are often controversial when they take place.
They are also local taxes in the true sense, as Irish local councils have rate-setting powers in both cases. In England, for example, the tax on business rates is set centrally by national government and local councils there do not retain the full business rates income collected in their local authority area. In Ireland, control over the rate of tax makes local councils accountable to residents and taxpayers.
From RTÉ Radio 1's Drivetime, a discussion on a new bill that would grant councils the power to impose penalties on businesses that have failed to pay their commercial rates
In other respects, the LPT and commercial rates are very different. The property tax is a relatively new tax whereas commercial rates date back to the 19th century. Commercial rates account for over 30% of revenue income, but the LPT accounts for less than 10%. While commercial rates are a tax on business as the base is commercial and industrial properties, the LPT is a tax on ownership of residential properties. Collection rates differ, with, on average, collection rates lower for commercial rates (86% nationwide in 2017, ranging from a low of 74% in Donegal County Council to a high of 96% in Fingal County Council) than for the LPT where the national average was 97%.
The LPT has a relatively high profile and attracts more media attention than commercial rates. While this may be understandable given the newness and the salient nature of LPT and the rise in residential property prices since the first valuations for LPT purposes, it is both disappointing and unwise. As businesses and commercial activity do not have a vote in elections, weak or short-sighted local governments often see this as a reason to levy excessive taxes on the business sector, knowing they can avoid any potential backlash from other undertaxed local taxpayers and voters.
There is a strong economic argument that the tax burden should be imposed on those that benefit from the public services that are financed by the tax payments. One such beneficiary is the owner of a residential property as the property owner avails of the local services provided by the council, such as road maintenance and street cleaning, libraries and cultural programmes, fire service, parks and playgrounds etc. Whereas this would suggest a tax take more from LPT and less from commercial rates, the inverse is true. As alluded to above, income from commercial rates, totalling €1.5bn, far outweighs the LPT yield of about €500m (over €100m of which is for self-funding and over €75m of that is for capital spending and, thus, not for discretionary day-to-day spending).
From RTÉ Radio 1's Morning Ireland in April 2019, Minister for Finance Paschal Donohoe on how changes to the Local Property Tax are to be deferred for another year
As an independent observer of local government funding and with no vested interest in one revenue source over another, I believe more research, evidence and debate is needed on the respective merits of commercial rates and the LPT, and on the optimal balance between these two local government revenue sources. There are many interesting public policy questions about commercial rates that do not get the attention they deserve.
For example, aside from historical levels and the requirement to balance the budget, how can the wide variation in ARVs nationwide be explained? For example, Kerry County Council charge a rate of 79.25 as against a rate of 56.77 imposed by Tipperary County Council. How much are above-average ARVs harming local business activity – existing and latent - and regional economic growth? Could greater commercial activity be incentivised by lowering the ARV on businesses, and particularly on the indigenous SME sector, while at the same time, maintaining, by means of tapping other income sources (service charges and/or the LPT, for example), sufficient revenue income for local councils to deliver local public services and ensure local fiscal discipline?
From RTÉ Radio 1's News At One, Martin McSorley from the Irish Petrol Retailers Association on difficulties facing roadside service retailers, as they deal with rising commercial rates
Contrary to popular opinion, a call for an increase in revenue income from the LPT in order to increase non-business property tax revenue more in line with the norm in other countries (the LPT in Ireland accounts for less than one percent of total tax revenue, and is dwindling as a share of the total tax take) could allow some fiscal space for a reduction in commercial rates. This would keep total local taxation constant i.e. a revenue-neutral change, in the absence of any change in expenditure functions assigned to local authorities in a local government sector that is highly centralised.
Despite the political sensitivities involved, the best way to introduce this would be to allow residential property revaluations to proceed, and to be done on a regular and timely basis, to avoid similar political difficulties in the future. In turn, councils should be allowed to keep the extra revenue from the higher LPT yield. They would then face policy choices: do they use the extra revenue from the LPT to reduce commercial rates and/or the service charges that are closely linked to economic activity? Or do they increase the quality of local public services. For councils in deficit, do they run overall surpluses to reduce the accumulated revenue balances, or do they use the funds in the future to finance public investment, such as large-scale infrastructural projects?
A policy debate on changes to the LPT is also necessary. For example, we need to re-examine the funding, size and methodology of the fiscal equalisation grant currently from LPT receipts. This Robin Hood-type equalisation programme sees council income from urban and especially Dublin-based councils with large property bases redistributed to those councils with smaller tax bases, many of which are rural with relatively low levels of economic activity.
From RTÉ Radio 1's This Week, Fianna Fáil councillor Deirdre Heney and Green Party councillor Neasa Hourigan discuss if Dublin homeowners be paying more in local property taxes
Rather than the current formula and distribution model, where the baseline is essentially based on the 2014 general purpose grant amounts, a more transparent and formula-based objective model is required in the medium term. This would preferably use estimates of fiscal capacity and expenditure needs as is common in many other countries.
Whereas the focus of local councils in the next month will be, and rightly so, on services and funding for 2020, the hope is that central government and especially the Department of Housing, Planning and Local Government will consider some of the issues raised here. By doing so, they would contribute to a revamped funding system for local government that is more conducive to a growing business and commercial sector. At the same time, they could ensure adequate income for all local authorities (whether big or small, rural or urban, in surplus or deficit) and provide high-quality public services to local residents.