Local property tax must be reformed before 2019
Tax falls unfairly on south Dublin houses and defies logic of revenue stability
Unless we change how we calculate local property tax, the increase in LPT many families will face in 2019 will be excessively high, and will present them with an unmanageable financial burden. Photograph: Gareth Fuller/PA Wire
Now that an economic recovery is well under way and Irish finances are no longer in crisis, it is time to take a fresh look at the local property tax and consider if its current format remains the most effective. It is worth considering if the tax, in its current guise, risks achieving exactly the opposite of what was intended.
The local property tax (LPT) was introduced while Ireland was suffering an unprecedented financial and economic crisis and, among other objectives, it was intended to offer a more stable source of revenue than was on offer from stamp duty at the time.
At present, individuals pay LPT proportional to the value of the property they own. This is problematic because the Irish property market has remained highly cyclical. Since property prices crashed to rock bottom, we have seen a 60 per cent increase in house prices over the last five years.
By linking directly to property prices, the LPT could actually defeat the purpose for which it was intended and become a very volatile source of tax. Revenue would decrease if another downturn hit. Unfortunately we saw this with the recent economic crash. Revenue from stamp duty decreased by a massive €2.8 billion between 2006 and 2009.
According to the Daft.ie Q1 house price report, Irish house prices have increased by 40 per cent since the third quarter of 2013, the nadir of the Irish property market during the crash. This market volatility is particularly pronounced in south Dublin where the average property values are not only the highest in the country but are now 60 per cent higher than in 2013.
There is little indication that property prices will stop rising anytime soon.
The effect of this volatility on the LPT has not yet become apparent as the Government took the decision to freeze LPT until 2019. This effectively means we are still paying LPT on 2013 property values.
Such a freeze was more than welcome as the tax burden on homeowners is already exceedingly high. However, basing taxation on outdated property values is not sustainable in the long run.
We need a solution before 2019. Otherwise, homeowners across the country will be hit with significant hikes in the LPT they pay. In south Dublin, the average homeowner would pay €945 a year in property tax if rates were revalued at today’s property prices. This represents an increase of just over 60 per cent over what they are paying currently, based on 2013 property values. Such an increase would be completely unsustainable for families to bear.
It is already the case that high and rapidly growing property prices in Dublin mean homeowners in the city pay a disproportionate amount in property tax. This was recognised in the Thornhill report which noted a “wide degree of regional variation in band changes with the largest band increases, and as a consequence tax liability increases under current legislation, mainly occurring in the Dublin area”.
LPT hike looms
As property values in south Dublin are only likely to increase in value further over the next two years, unless we change how we calculate local property tax, the increase in LPT that many families will face in 2019 will be excessively high, and will present them with an unmanageable financial burden.
Incomes have not risen to meet the growing taxation burden placed on middle-income families. There are also many older people and those otherwise on fixed incomes, who are already being put under tremendous financial pressure by the burden imposed by the local property tax. A further hike in LPT would be simply punitive and unfair.
The Taoiseach, Leo Varadkar, has previously indicated his openness to altering the property tax system and to give local councils more power to retain collected taxes. This is greatly welcome as we need action and we need creative solutions before 2019. The concentration of the property tax burden on a small geographic area is neither sensible nor just.
Alternative methods of calculation based on site value or the size of a property should be explored. Both have the benefit of relative price stability and would spread the LPT burden more evenly across the country. Greater discretion for local authorities to amend local rates could also assist in addressing this problem.
We are no longer a country in economic crisis but we must continue to prioritise economic stability with our taxation policy. In this regard, the local property tax, as introduced in 2013, is no longer fit for purpose. We need to explore alternative methods of valuation to ensure that the tax is a stable and sustainable source of revenue, and that it falls equitably across the country.