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Local Property Tax: Another case of the Dubs versus the rest

Smart Money: Why are Dublin councils cutting bills and many others voting to increase them?

Councils across the country have been voting on the level at which they will charge local property tax for 2020. As reliably as Greece and Cyprus voting for each other in the Eurovision, the four Dublin councils have voted to continue to reduce the annual charge for households. However a lot more authorities outside Dublin are voting to increase the charge this year, to provide more cash for local services. This is a big change from a few years ago. But should Dubliners be getting a reduction? And why is the tax so controversial in the capital? A lot of it comes down, not only to house prices, but how the money is allocated.

1. How can the tax vary across the country?

Local councils can vote to increase or decrease the charge by 15 per cent from its base level each year and decisions now being taken will show up in your bill for 2020. This has an impact on council finances – while some revenue is shared across councils, the cost or benefit of changes from the base level are taken directly in the budget of the voting local authority.

As Jennifer Bray reported, 14 out of 24 councils that have voted so far have decided to increase the rate from its base level next year. This is the first key trend to note, as just five voted to increase it last year. This reflects pressure on local authority finances and demands for better services. It is a big turnaround from 2015 when 14 voted to cut and the remainder voted for no change.

This year eight councils have voted to increase by the full 15 per cent. Just one – Longford – did so last year. It has now been joined by the likes of Roscommon, Leitrim,Offaly, Clare, Sligo and Kilkenny. Limerick, which applied a 7.5 per cent last year, joins the 15 per cent club for 2020.

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In Dublin, meanwhile, three councils – Dublin City Council, South Dublin and Dun Laoghaire/Rathdown – voted to maintain the 2019 cut of 15 per cent from the base, while Fingal also retained the status quo of a 10 per cent reduction. This was despite warnings from council management in all these areas about the impact on services.

2. Why the urban rural/divide?

It seems to mainly come down to house prices. The higher level of prices on average in Dublin means the tax is more politically sensitive in the capital. And the fact that 20 per cent of the tax collected goes into a central fund which benefits poorer councils – and that the mechanism used leaves even less additional funds available to big authorities for purely local services – is also used by politicians in the capital as a reason to vote for cuts.

In the Dublin councils, an alliance of councillors from better-off areas are combining with Sinn Féin, People before Profit and other hard left Independents to vote for the maximum – or near maximum for Fingal – reduction.

In Dublin City Council, the State’s biggest, Fianna Fáil, Fine Gael, Sinn Féin, People before Profit and some Independents voted to reduce the charge by 15 per cent while Labour, Greens and the Social Democrats voted to leave it at the base level. This was despite warnings from city management that this would leave €12 million less for local services .

Among the reasons given by those voting for a reduction was that the tax was an unfair burden on Dubliners, that some of the revenue did not stay in the capital and that it was a tax on the family home. Those voting against a reduction argued that more cash was needed for services and that the cut would deliver a big boost to those in really valuable houses.

Higher house prices make the tax more contentious in the capital. In Dublin, the average house price of around €375,000 would put many people in the band where the base tax level would be €675. So the 15 per cent cut saves them €100.

In South Dublin, many homes would be in the €600,000 to €650,000 band, where the base tax charge is €1,128. They would save just under €170 from the 15 per cent cut. For very valuable houses the saving is greater – more than €450 for a house of around €1.5 million.

At the other end of the scale, average prices in counties such as Leitrim and Roscommon are around €150,000, meaning they would pay either €225 or €315. So the amounts in play here are much smaller. A 15 per cent rise by these councils from the base level would typically cost homeowners €34 or €52.50 extra per year – or just €1 extra per week.

This seems to swing the political balance – and the financial position of some of these councils was no doubt also a factor.

3. Should Dubliners pay more? Should those outside Dublin pay less?

This is, of course, a political decision. In Dublin, the strong verdict of a public consultation on the issue held by Dublin City Council was that the maximum reduction should be applied. Ask people do they want to pay more tax and they will only give you one answer. In part this seems to come down to some lingering resentment in Dublin that the tax is unfairly balanced against them.

To combat this, Dr Don Thornhill, who did a report for the former finance minister Michael Noonan on the property tax, said that the current system under which some revenue is redistributed from richer councils to poorer ones should end. Instead, less well-off ones should be supported from the central exchequer, he said. A review by Government officials accepted this recommendation and also the Thornhill view that in future authorities should not be allowed to cut the rate, only increase it. However the Government had made no decision on this.

There also seems to be a deeper problem here – a lack of faith that paying higher taxes will actually lead to better services. True or not, this is the perception of many.

This means that in rural counties where the tax will be increased next year, the extra revenue is in many cases being allocated to specific projects, rather than just going into the fund for central spending. So in Wicklow, for example, the extra €1.7 million raised will go towards providing the council’s share of funding for projects such as the Blessington Greenway, Arklow town centre, library redevelopment in Wicklow town and a CCTV scheme in Greystones.

There is a strong economic and budgetary case for the local property tax. As a tax on a fixed asset it causes less economic damage than a tax on income. It is progressive, in that those in more expensive houses pay more – though they are not necessarily the same as those on higher incomes, of course. It is also a small tax on the main source of Irish personal wealth and provides what should be a steady income source to the exchequer protected, in part, from the economic swings.

Taxes on property holding are low in the Republic compared to many other countries, as are local revenue-raising powers for local authorities. The Thornhill report pointed out that domestic rates (a version of property tax) in the North average over €1,000 per house and account for 4 per cent of tax revenue up there, compared to the local property tax coming in at just over 1 per cent in the Republic, where the average bill was €257.

4. How important is all this to the local authorities?

In total, local property tax provided around 10 per cent of all spending last year, including an amount which better-off authorities are allowed to retain for spending in areas such as roads which would normally come from the exchequer. Excluding this, it accounted for around 8 per cent of funding. However a small number of councils rely on the tax – and the redistribution from richer to poorer parts of the country – for significant revenue. For five authorities it represents 20 per cent or more of revenue.

The redistribution mechanism makes it particularly important for smaller authorities with low local property tax bases – and also low commercial rates bases. A number get more from the redistribution of the local property tax than they get from tax collection in their own area. For example Longford is expected to collect €2.1 million this year but will have a total LPT allocation of €8.9 million.

Dublin City Council will collect around €68 million this year – after the 15 per cent cut – and will have €52 million available for spending . However €23 million of this is for normal local authority spending, with much of the balance used for what is called “self-funding” – spending on roads and housing, which would normally have come from the central exchequer. There is no doubt that this mechanism is part of the political mix in Dublin in relation to the cut.

5. What does this tell us about tax in Ireland?

A few points are evident. The LPT works well but the actions of the Dublin authorities are cutting its base and leaving less cash for services. This is an issue for the future of the tax, a decision which the Minister for Finance has kicked out until next year. Wider choices also need to be made on how valuations are set in future. There is no chance that bills will be allowed to rise in tandem with house prices. But what basis will be set and will some people face a rise? Various proposals examined by officials looked at cutting the rate to adjust for higher prices – but all lead to some losers as well as winners.The Thornhill report said a target revenue amount should be set for every local authority each year and the tax then set on that basis. He also recommended that tax collected locally should be kept locally. The Government – or the next one – is now due to decide how to proceed next year.

There is also a wider issue about the huge problems attached to tax reform, the political difficulty of even small increases and the issues caused by any perception of “unfairness”. And then there’s difficulty in persuading voters that money is well used. This is a key issue for the planned increase in the carbon tax, where the indications are that the initial rises will be modest and much of the money will be directly allocated to specific projects. And even so, there will still be a row.