Politicians run for cover over future of property tax

How much local property tax (LPT) will you be paying in two years' time? Quite a lot more, if nothing is done, as bills would rise along with house prices. But in post water charges Ireland, this is not an option. The risk is not of big increases in property tax bills – this will be headed off, as Minister for Finance Paschal Donohoe made clear as he launched a review of the tax on Tuesday. The risk is that the reforms to come will ensure that the tax is allowed to slide away into irrelevance in the years ahead. The LPT could die from neglect.

The house valuations on which the tax is based are due to be updated in November of next year, for the first time since the tax was introduced under the troika programme in 2013. If nothing was done, the rise in house prices in the meantime would lead to increases for the vast majority of households.

Such is the increase in prices since 2013 that pretty much all properties would rise to a higher band and most would jump a few bands higher, if no action was taken. Since 2013, house prices have risen by 71 per cent , according to the latest CSO figures, with Dublin prices up 76 per cent and prices outside the capital up by 63 per cent on average.

What would this mean? A modest property worth €145,000 in 2013 would now, on the basis of the average national increase, be worth €247,000, increasing the annual tax from €225 to €405. A house valued at €470,000 in 2013 would now, on average, be worth €803,000. This would increase the annual bill from €855 to €1,485. A house valued at €630,000 in 2003 would now be worth €1.077 million, increasing the bill from €1,125 to €1,948.

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Doubling of bills

And this is all before further price increases likely up to November 2019, when the next valuations are due, which could conceivably lead to a doubling of bills for many. This simply won’t be allowed happen.

In launching the review of the LPT, the Minister for Finance, Paschal Donohoe, has said that it “will be informed by the principle of achieving relative stability in the LPT payments of those liable for the tax.” But how do you achieve this?

In a 2015 review of the tax, Dr Don Thornhill recommended some reverse engineering. Under his plan,the LPT would still be paid in relation to house prices, as it is now. But the level of the tax would be adjusted each year based on the needs of local authority funding each year – a way to keep payments reasonable stable from year to year. Minister for Housing Eoghan Murphy has suggested it might be based not solely on house prices.

A big increase in the tax liability in 2020 can be avoided by adjusting the bands on which the tax payments are based, or indeed the rates charged. The political issue is that this may create winners and losers, or at least may leave some with the same or similar bills and some facing increases.

Future of the tax

The economic question is what does this mean for the future of the tax. Is it a tax based on property value, a fixed annual charge, or what? And will the tax increase over the years – in line with house price inflation, or local authority funding needs – or be left at current levels and thus gradually become less and less relevant? In the current environment, in the wake of the water charges fiasco, the latter risk is a real one.

Such are the anomalies in the tax that it is arguably already at risk of legal challenge. Look at the exemptions. People who bought in 2013 are exempt, provided the house remains their primary residence. So is anyone who bought a new house after January 1st, 2013. These exemptions are due to run out at the end of October 2019 – in other words these people would be liable to make a return and pay the tax for 2020. More political heat would result from this.

Deep scar

The water charges debate has left a deep scar on our politics and our ability to have any kind of logical discussion on how to raise revenue to pay for essential services and for investment. The local property tax was a good idea, forming a stable source of revenue and a new source of funds for local authorities. The alternative is yet more of other taxes. And we saw from the crash the need to spread the tax base.

The LPT raises less than €500 million a year, less than 1 per cent of total taxation, though it is a useful source of money for local authorities. Yet even such a modest tax is now in danger of being slowly killed off, with signs already of politicians on all sides running for cover.