Will you end up paying more tax after Budget 2020?

The Government only has €700 million in room for manoeuvre in Budget 2020, due for delivery early next month.Or at least this is what is available what might be called "normal" budget measures – the everyday fare of more spending and lower taxes. The Minister for Finance Paschal Donohoe has said he will borrow more for special Brexit measures – but warned there will be little relief elsewhere. But this is the last budget before a likely general election, and the Minister is likely to seek extra tax in some areas to pay for some tax cuts elsewhere and spending increases . So where is your pocket likely to be hit ?

1. Income tax

This may not seem to make sense. After all, we may get some limited PAYE relief – and taxes on income in most areas are not likely to rise. But there is a subtle point here which is often missed. If you are going to get a wage increase next year, then unless tax credits and the tax band which determines when you start paying at the higher 40 per cent rate is adjusted, you will end up paying a slightly higher proportion of your income in tax. You will still be better off in cash terms, but the exchequer will take a slightly higher slice of your income. This may not make much difference in one year – but it does over time. In economic jargon it is called fiscal drag.

And remember that the Programme for Government agreed when this administration was formed foresaw the lack of indexation of credits and bands as one way to raise more cash. This is not happening by accident.

The Government has raised the band which determines the income level at which people enter the higher 40 per cent rate rate by €750 in each of the last two budgets to €35,300 now. However this rise of 4.4 per cent is behind the rise in average earnings of around 6.2 per cent over the two years. And general tax credits have not increased – chipping away at their “real” value – even if there have been rises for some, including the self-employed.

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Meanwhile the 2018 promise by the Taoiseach to increase the standard rate band progressively to €50,000 over five years – requiring a €2,500 rise a year – is off the table, for this budget anyway. Pre-budget research from the Tax Institute confirms that the income level at which people enter the higher rate here is well below that in most other EU countries.

2. Carbon tax

Introduced in 2010 by the Fianna Fáil/Green coalition as both a fundraising and environmental measure, the tax has remained at its introductory level of €20 per tonne of CO2. An increase was expected last year – but was postponed. But with pressure to address the building environmental crisis, higher carbon tax is back on the agenda and the Government’s own environmental strategy says the rate should increase to €80 by 2020.

A €10 increase in 2020 would add around €1.70 to a 60-litre petrol fill, €1.96 for diesel, €2.40 for a 40 kg bag of coal and 52 cent for a briquette bail. However there is also a Government commitment to examine how to repay some or all of this cash to households, particularly lower-income households who would suffer most, in proportion to their income.

This whole area is controversial given the need, if the move is to have any impact on people’s behaviour , to signal a succession of increases in carbon tax in the years ahead and the lack of agreement to date on how the issue of repayment is to be dealt with. This will limit the positive impact on the exchequer, though some of the taxes could be used to pay for environmental investments which would otherwise come from general tax. The Tax Institute pre-budget papers also point to the need to consider how to replace tax revenues in the years ahead as we cut the use of heavily taxed fossil fuels and also of petrol and diesel.

So will it happen this year? The Finance Minister is still hedging his bets – using the phrase “ if” the tax is increased in the budget in comments recently – and has emphasised that any revenue will be used to help families adjust and fund investment.A €10 increase would raise a gross sum of a little over €100 million . Fianna Fáil seems to support the move – though by how much is not clear. After the water charges, any tax increases are hugely sensitive.

3. Diesel and petrol equalisation

Diesel is currently subject to lower tax than petrol, despite being a higher emitter of CO2. Diesel is now taxed at 42.5 cent per litre compared to 54.1 cent for petrol. Pre-budget papers from government officials in the Tax Strategy Group point out that if the tax was purely based on CO2, then diesel tax would actually be higher at 62.9 cent per litre. However diesel is also a more efficient fuel than petrol, so the officials studied a five-year programme to equalise the current excise gap between the two.

Bringing diesel up to the level of petrol over five years would,the officials have calculated, raise €81 million additional next year , or around €400 million after five years. This would increase the cost of a 60-litre fill for a diesel motorist by around €1.40 next year or by €7 when the process was complete in five years.

The threat of Brexit – and its possible impact on the diesel-dependent haulage industry– could give the Minister pause for thought here. Diesel costs would also have to be considered in the context of any carbon tax change, even though the carbon tax on motor fuels is a low percentage of the total price – around 3 to 4 per cent.

4. PRSI

This is an interesting one – though action here has been postponed so consistently that you wouldn’t bet on any movement this year. Remember that this Government promised to start the process of merging PRSI and the USC charge a – a kind of half-way house to the now-abandoned and always-unaffordable promise to “ abolish” the USC. However this concept has proved hugely complicated, as outlined in an inter-departmental study published earlier this year,

Mr Donohoe kicked this one into row Z in the stand after the report, using his best Sir Humphrey language to say that the issue is “a complex one and will take time to consider”. Decisions will be taken “in due course” he said and announced “ at the appropriate time”.

So with this plan now apparently off the table, Government officials have warned that there is no way to combat a big hole appearing in the Social Insurance Fund – which is funded by PRSI and out of which benefits are paid – in the years ahead. To combat this, the Tax Strategy Group proposed increases of between 0.25 to 0.5 per cent in PRSI rates each year over a period of years.

As pointed out in the Tax Institute pre-budget document this week, the Tax Strategy Group also called for greater contributions from the self-employed – via either higher rates or a higher minimum payment. The self-employed now qualify for most of the same benefits of employees, but still pay a lot less. Currently the self-employed pay at a rate of 4 per cent, compared to a combined employee/employer rate of 14.95 per cent. Changes proposed here could be very significant for self-employed people.

There are chunky amounts of money potentially available to the exchequer from PRSI changes, but putting more tax on income ahead of a possible no-deal Brexit may be seen as too risky.

5. Excises – and the rest

At least one of the so-called old reliables – tobacco excise – may well be hit again. Alcohol excises have been largely spared in recent years but are another area where significant amounts could be raised. Again Brexit could be a factor here.

The Tax Strategy papers also look at potential changes in VRT and motor tax – and to the regime applying to BIK to company cars – which could lead to those buying or using more polluting cars facing more VRT, potentially significantly more if some of the Tax Strategy Papers are acted upon. A change in the base on which VRT is collected to better measure polluting vehicles is one of the options.

The papers also examine the possibility of changing the bands that apply on motor tax – which could lead to many with average cars paying more – and changing the incentives currently in place for buying more fuel-efficient cars, particularly including conventional hybrid vehicles.

There could well be changes here based around an environmental rationale – the only question is how quickly they will be phased in.