Local Property Tax: Change for better or worse?

Local Property Tax: Change for better or worse?

 

Introduction.

Local Property Tax (LPT) was introduced in 2013 using valuations for May of that year as a base. The tax is due for re-basing on 2019 property values, and this is likely to produce a mixture of political opportunism and panic which may well lead to “reforms” which fundamentally undermine the tax.

 

Residential property taxation is part of the local or municipal tax base in most countries[1]. The traditional Irish property tax (domestic rates) was so archaic and badly-designed that it easily fell prey to political opportunism and was abolished in 1977. Rates on Commercial and Industrial property remain, and are probably in need of reform, but that is an issue for another day.

 

The malaise of property taxation is closely linked to the decay of local government in Ireland. Local Authorities have very little truly independent taxing power; the residential LPT operates under national rules and collection is done by a central government agency – the Revenue Commissioners. Local Authorities have lost many of their responsibilities: for water services, many road services, garbage collection, and so forth. Such powers that they have are often tightly circumscribed by central government directives and rules. No wonder local politicians, who have so little real power over local policy issues get involved in the politics of Palestine, Catalonia or Myanmar. Worthy causes maybe, but not local ones.

 

If we are to have local government which actually works and which is worthwhile and has some real policy discretion, then it will have to have some degree effective control over its tax revenues. This is essential: local government which is almost totally dependent on central government for its revenue, will forever be rattling the begging bowl and will never have to ask how to pay for the local public goods which citizens want. Just pass the buck to central government.

 

Local Government is often quite rightly regarded as inefficient and ineffective. The LPT provides a good example: the local authorities’ collection of the LPT’s predecessor (the Household Charge) resulted in much lower compliance than that subsequently achieved by Revenue. Local Authorities have also been ineffective in collecting water charges for commercial users, and have had chronic problems with rent and mortgage arrears. The latter problems are undoubtedly explained in part by social factors, but overall the operational efficiency of local authorities has not been impressive, which may explain why they have been stripped of so many functions.

 

Putting this right will not be easy. The culture of local politics has been degraded by its unhealthy relationship with the centre. Local councillors become adept at rattling the begging bowl. Given that getting elected to a local council is the main route to an eventual career in national politics, this is the worst possible apprenticeship for national politicians, who often tend to have the same attitude to financing national public expenditure: a total disconnect between spending money on something and having to solve the problem of how to pay for it.

 

A report[2] by Dr Don Thornhill prepared as part of the 2016 Budget documentation contains many proposals aimed at preventing the tax from being degraded in various respects and also at improving its structure. Dr Thornhill estimated that substituting 2016 for 2013 property valuations would produce a revenue increase of about 29%, so we could say that making a “big bang” change and using 2019 valuations would probably produce an increase in LPT charges of at least 50%. I do not intend to look at details of yield estimates or how this might vary from area to area. For the purposes of a very general discussion I will take a 50% increase as a reasonable first approximation if there were to be a “big bang” in 2019. Clearly this sort of increase is what scares politicians to death, and scared politicians are liable to propose measures which are both unfair and inefficient.

 

Looking at Don Thornhill’s proposals for changes to LPT, I quickly became aware of the similarities between his ideas and mine. Maybe this is not surprising: familiarity with the same fundamental concepts in public finance and the political economy of taxation might be expected to lead to a convergence of views. Don Thornhill’s proposals are worked out in much greater detail than anything I attempt to outline here, but getting the big picture right seems to me to be an essential first step.

 

Some proposals:

(i) Have a full property revaluation in 2019. The impact of this can be drastically reduced, but allowing valuations to become hopelessly out of date runs the danger of LPT valuations becoming like the old rateable valuations: works of fiction bearing no relation to reality. Ultimately doing nothing would undermine the LPT completely (something that some politicians[3] want, of course).

(ii) Avoid a “revaluation shock”by adjusting the tax rates (at present 0.18% up to €1m and 0.25% for that part of values in excess of €1m) so that the yield increase is relatively modest (say 10%). On a simple back-of-the envelope calculation, rates of 0.12% and 0.20% with a threshold of €1.5m might come close to achieving this.

(iii) At present, some of the LPT revenues arising in a local authority area are redistributed from high to low income areas via a centrally-administered fund. This has the effect of weakening the net local revenue effect of any decision the local authority makes (such as the discount or premium to apply in any year), Effectively any increase in revenue may be diluted by having to pay some into a central fund. The solution (also recommended by Don Thornhill) is to leave local authorities with 100% of the LPT revenues from their area and thus 100% of the revenue consequences of any decisions they take. This implies a separate central government grant mechanism to give local authorities an acceptable degree of resource equalisation, It is essential however that this is based on relevant structural factors such as demography, population density, estimates of local income levels etc.

(iv) Consider adjusting the amount of discretion available to a local authority to something in excess of the present ” 15%. This might slowly educate local authorities and councillors in exercising greater fiscal responsibilities[4].

(v) As Don Thornhill recommends, re-title the tax as a Local Council Tax. A minor point maybe, but in an era of spin getting the title right and emphasising the responsibilities of the local council would be worthwhile.

 

Mistakes to avoid.

In any discussion of reform it is important to avoid making things worse, especially as some really bad ideas have been aired.

 

  • Earlier this month (Jan 15th, 2018) the Sunday Times in an editorial seemed to favour the idea of basing the LPT on house size[5]. Why should someone in 4-bedroom semi in Dublin 4 pay several times what a person in a similar house in Leitrim or Roscommon pays? Consider a household with a total income of, say, €60.000. A four-bedroom house in Dublin 4 will probably cost over €800,000 and will be way beyond the what is affordable to buy for most €60,000 income households. The house of similar size in Leitrim or Roscommon might be bought for €200,000 to €300,000, and be within the budget and borrowing power of a €60,000 income household. So for this reason alone (there are others), it is a fair bet that the incomes of people living in similar-sized houses will be higher in areas with higher property values. Sure, high property values may imply high mortgage debt, but in the long term when retirement beckons the Dublin 4 household will have much better options for downsizing and equity-release than the someone with an asset worth less than €300,000. High value areas have in general residents with higher income and wealth.

 

  • Landlords would no doubt argue that it is inequitable that their tenants do not have to pay LPT whereas owner-occupiers do. (They really mean that it is unfair that they have to pay, but leave that aside). This raises interesting questions about the incidence of LPT. One might argue that in the long-term rentals have to cover the full economic cost to landlords, and that otherwise they will exit the market. In that case (barring distortions such as rent controls) the long-run incidence of LPT would be on tenants. However in the current state of the housing market, landlords as owners of a relatively fixed-supply of properties are likely to be making economic rents[6] and the incidence of the tax would be on them. Also in the long run we would expect LPT to capitalised into (slightly lower) house valuations so its incidence would be on property owners in general, whether owner-occupiers or landlords[7]. Overall I see little merit in changing the current arrangement for landlords – and fortunately unlike other not-so-good ideas there is little political momentum behind such a proposal.

 

Some more general conclusions.

  • There is a real need to reform local government and to gradually give it more real powers. This is now a well-worn cliche, but one seldom hears any substantive discussion of the issues involved.
  • I say gradually give local authorities more powers because the present culture of local politics does not lend itself to fiscally responsible behaviour, so local councillors face a steep learning curve. Fiscal responsibility is an essential part of political and policy responsibility. Giving local authorities power without (fiscal) responsibility reminds me of Stanley Baldwin’s remark on the subject. A properly adjusted LPT is an obvious route to greater local fiscal responsibility.
  • We should not get too hung up on questions of progressivity or fairness. Overall the LPT may not be quite as progressive[8] as Don Thornhill suggests, but it only accounts for about 1% of all tax revenues and there are other larger taxes in the system which are decidedly more regressive. In any event it is the overall progressivity of the combined tax and benefit system which really matters and in this respect Ireland scores very highly.
  • It has been argued that higher LPT could be traded off against lower income tax rates. While this is in principle a valid proposition, especially as property taxes are held to be less distortionary, in practice it is a difficult argument to sustain. A doubling of LPT revenues would fund a very small cut in Income Tax or USC rates. LPT reform should be done on its own merits as a mainly a local authority issue. While a relatively minor tax in relation to the total national tax take, LPT could and should be central to the operation of effective and responsible local government.

 

[1] The obvious reason being that taxation specific to a local area which is part of a single national economy is best based on relatively immobile assets.

[2] Review of the Local Property Tax (LPT): http://www.budget.gov.ie/Budgets/2016/Documents/Review_of_Local_Property_Tax_pub.pdf

 

[3] Somewhat bizarrely, politicians on the extreme left.

[4] Don Thornhill advocates authorities being able to vary the rate of tax and perhaps the size of the bands. This seems to me an un-necessary complication. One can achieve much the same effect on tax bills by using the ” 15% instrument. Keep it simple should be the watchword.

[5] Quite predictably, that reservoir of bad economic ideas (the Irish Times letters page) recently published a plea for a floor area-based tax. Also quite predictably, it was from that well-known deprived area, Dublin 6.

[6] i.e. rents in the classic economic definition considered as a surplus over and above the supply price.

[7] The question of incidence can get quite complicated. If I own a house I have to pay LPT whether I occupy it or rent it out. In that case how does it enter into my decision? If I sell it, and if LPT is capitalised into the price, how does that effect my decision?

[8] While LPT may take absolutely more money from those with higher incomes, it does not follow that it takes a greater proportion of income from those with higher incomes, which is the classical definition of the concept of progressivity.

Boris Builds a Bridge

In a competitive field yesterday’s bridge across the English Channel, proposed in a solo run by foreign secretary Boris Johnson, must rank as the zaniest piece of headline-hunting since the Brexit referendum. The occasion was the visit to Britain of French president Emmanuel Macron, to meet Theresa May rather than Boris. May and Macron agreed an Anglo-French committee to consider future, but unspecified, collaborative projects, just the ticket to fill out an otherwise thin official communique from the two leaders. How to upstage?

The Boris Bridge worked a treat, reported deadpan as a news story by the BBC, prominent in the Daily Mail and the front-page lead in the Telegraph. The Express was able to offer a real scoop:

‘Emmanuel Macron has jumped at the chance of building a giant bridge linking the UK and the EU after Boris Johnson floated the idea during meetings yesterday, it has been revealed.’

Revealed to the Express only. Denials that the bridge is on any official agenda were duly issued on both sides of the channel and the wretched FT, read mainly by foreigners, did not mention the story at all.

A day later the BBC and the newspaper websites finally got round to phoning a few engineers, some of whom were unsporting enough to mention the last two great Anglo-French collaborations, Concorde, cost over-run 450%, and the channel tunnel, a snip at just 80% over budget.

The British media, including the BBC, have done an appalling job in covering the continuing Brexit circus.

Call for Papers – 6th Annual NERI Labour Market Conference – 22 May 2018

The sixth annual NERI Labour Market Conference will be held on Tuesday 22 May 2018 in association with NUI Galway’s Whitaker Institute for Innovation and Societal Change. The conference will run from 10:00am -16.15pm (followed by a reception until 16.45pm) and will include research papers on various aspects of the Irish labour market and Irish labour market policy. The NERI Labour Market Conference is intended to provide a forum for the presentation of research papers on labour market issues (North and South) and is held in May each year. Presentations from researchers, academics, policy makers and labour market practitioners are invited for this forthcoming conference. Those interested should submit a title and brief abstract (max 400 words) to tom.mcdonnell@nerinstitute.net Possible topics include but are not limited to any part of the following thematic areas:

  1. Employment, Unemployment and Labour Market Transitions (Migration, Age, Gender)
  2. Earnings, Labour Costs and Affordability
  3. Productivity, Growth and Human Capital
  4. Precariousness, Low Pay, Working Conditions and Job Quality
  5. Labour Market Participation and Activation, Demographics and Labour Supply
  6. Labour Market Institutions: Minimum/Living Wages, Collective Bargaining, Workplace Regimes
  7. Distribution and Labour Market Inequalities, Fiscal Policy and the Labour Market
  8. Pensions and Pensions Policy

Registration The conference is open to all who are interested and is free to attend. However, you must register your intention to attend the conference by contacting info@nerinstitute.net

Key Dates

Submission Deadline: 13 April 2018 (Friday)

Notification of Acceptance: 24 April 2018 (Tuesday)

Registration Deadline: 18 May 2018 (Friday)

Conference Date: 22 May 2018 (Tuesday)

Contact: tom.mcdonnell@nerinstitute.net

Call for Papers: Irish Economics Postgraduate and Early Career Conference 2018

Call for Papers: Irish Economics Postgraduate and Early Career Conference 2018

The Irish Society for New Economists (ISNE) workshop for postgraduate and early career researchers will take place in University College Dublin Geary Institute for Public Policy on Friday May 4th. The event is aimed at PhD students and early career researchers across the Irish universities. It will take the form of thematic sessions with faculty discussant input at each session, along with keynote talks, and engagement with policy and industry. We welcome submissions of papers from PhD students and early career researchers in institutions on the island of Ireland.

The ISNE was formed to encourage research, information and social links among economists at the early stages of their careers in Ireland. From 2001 to 2013, the Irish Society for New Economists (ISNE) held eleven workshops in Ireland for postgraduate and early career researchers. The events were run mostly by PhD students in the Universities, including events hosted by UCD, TCD, Limerick, Maynooth, Cork, and Galway. The conference is intended for advanced Masters students, PhD students, and young professionals in the early stages of research working in the Republic of Ireland and Northern Ireland. We strongly encourage those working on economics-related research to submit. Eligibility to present is not related to age. The meeting will feature the work and findings of scholars in economics and related fields, and will provide an excellent opportunity to present your own research results and work in progress.

As the conference is free to attend, no financial assistance for travel or accommodation can be provided. Researchers wishing to submit their work for consideration are advised to submit an extended abstract (300-500 words) at this link. Applicants are asked to include their name, institute or affiliation, current academic status (PhD, Young Professional, Masters) and JEL code(s) for their research on submitting an abstract. All of the above information should be attached in a /single PDF or Word File/. The deadline for the abstract submission is Friday, 30th March 2018. Applicants will receive notification shortly afterwards. The organising committee consists of Dr. Lisa Ryan, Dr. Benjamin Elsner, and Professor Liam Delaney at UCD, and Dr. Michelle Queally at NUI Galway. Please direct inquiries to liam.delaney@ucd.ie

Latest Issue of the Economic and Social Review

The Economic and Social Review has just published its latest issue (Vol 48, No 4, Winter 2017)

Articles
Introduction: 50 Years of Social Research at the ESRI
Helen Russell, Emer Smyth

Non-Monetary Indicators and Multiple Dimensions: The ESRI Approach to Poverty Measurement
Dorothy Watson, Christopher T. Whelan, Bertrand Maître, James Williams

Gender Equality in the Irish Labour Market 1966-2016: Unfinished Business?
Helen Russell, Frances McGinnity, Philip J. O’Connell

Out-of-School Social Activities among Immigrant-Origin Children Living in Ireland
Merike Darmody, Emer Smyth

An Irish Solution…? Questioning the Expansion of Special Classes in an Era of Inclusive Education
Joanne Banks, Selina McCoy

Policy Section Articles
Atypical Work and Ireland’s Labour Market Collapse and Recovery
Elish Kelly, Alan Barrett

Supporting Pension Contributions Through the Tax System: Outcomes, Costs and Examining Reform
Micheál L. Collins, Gerard Hughes

A Portfolio Approach to Assessing an Auto-Enrolment Pension Scheme for Ireland
Liam A. Gallagher, Fionnuala Ryan

Irish Economic Association 2018 Conference

Irish Economic Association Annual Conference 2018

https://iea2018.exordo.com

http://www.iea.ie/

The 32nd Annual Irish Economic Association Conference will be held at the Central Bank of Ireland, New Wapping Street, North Wall Quay, Dublin 1 on Thursday May 10th and Friday May 11th, 2018. Gerard O’Reilly (Central Bank of Ireland) is the local organiser (gerard.oreilly@centralbank.ie).

The ESR guest lecture will be given by Professor Wendy Carlin (University College London and the CORE project) and the Edgeworth Lecture by Professor Olivier Blanchard (MIT and PIIE).

The Association invites submissions of papers to be considered for the conference programme. Papers may be on any area in Economics, Finance and Econometrics.

The deadline for submitted articles is the 11thof February 2018 and submissions can be made through this site.

Who is fudging? (Answer: not the EU.)

There has been a lot of talk since yesterday’s deal pointing out that there has been a certain amount of fudging going on. But there is fudge and fudge, and it’s helpful to be clear about what’s being fudged and by whom.

Paragraph 49 states:

“The United Kingdom remains committed to protecting North-South cooperation and to its guarantee of avoiding a hard border. Any future arrangements must be compatible with these overarching requirements. The United Kingdom’s objective is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and Customs Union which, now or in the future, support North-South cooperation, the all-island economy, and the protection of the 1998 Agreement.”

These are commitments made by the UK to the EU and there is very little fudge here. The UK is committing as a backstop solution to the full alignment needed to “support North-South cooperation, the all-island economy, and the protection of the 1998 Agreement” in the context of an over-arching commitment to avoid a hard border. Avoiding a hard border requires full alignment for all traded goods. North-South cooperation involves the famous 142 areas of North-South cooperation we have been hearing about, and brings services like health into the mix. The all-island economy is even broader. And the Good Friday Agreement brings things like human rights into the mix.

Paragraph 50 states that:

“In the absence of agreed solutions, as set out in the previous paragraph , the United Kingdom will ensure that no new regulatory barriers develop between Northern Ireland and the rest of the United Kingdom, unless, consistent with the 1998 Agreement, the Northern Ireland Executive and Assembly agree that distinct arrangements are appropriate for Northern Ireland. In all circumstances, the United Kingdom will continue to ensure the same unfettered access for Northern Ireland’s businesses to the whole of the United Kingdom internal market.”

Notice anything? These are not commitments made by the EU. These are, once again, commitments made by the UK, in this instance to the DUP.

Paragraphs 49+50 appear to be a bit of a fudge, although the fudge can be undone by the entire UK maintaining full alignment with the EU. But let’s be clear: this is the UK fudging, not the EU, and the UK needs to fudge at this stage because of the internal contradictions of its own position. But the EU will naturally take the view that the UK must meet its commitments made to the EU in Paragraph 49. There is no fudge here: the EU has sought and obtained an impressive series of concessions from the UK, and the UK will be held to its word.

Note also that Paragraph 45 states that:

“The United Kingdom respects Ireland’s ongoing membership of the European Union and all of the corresponding rights and obligations that entails, in particular Ireland’s place in the Internal Market and the Customs Union. The United Kingdom also recalls its commitment to preserving the integrity of its internal market and Northern Ireland’s place within it, as the United Kingdom leaves the European Union’s Internal Market and Customs Union.”

These are again UK commitments, and the first of these is in the present context a commitment to respect the fact that the EU needs to police the external frontiers of its Internal Market and Customs Union. So the turning-a-blind-eye-to-smuggling non-solution is out.

And finally, note that Paragraph 46 states that:

“The commitments and principles outlined in this joint report will not pre-determine the outcome of wider discussions on the future relationship between the European Union and the United Kingdom and are, as necessary, specific to the unique circumstances on the island of Ireland. They are made and must be upheld in all circumstances, irrespective of the nature of any future agreement between the European Union and United Kingdom.”

The first sentence rules out the Brexiteers’ Baldrick-like cunning plan to use whatever special arrangements may be reached on the island of Ireland as precedents, allowing them to have their cake and eat it when it comes to the economic relationship between Great Britain and the European Union. And the second sentence commits the UK to uphold its engagements on Ireland in all circumstances.

As I say, it doesn’t seem to me as though the EU allowed much fudging when it came to the UK’s commitments to the EU regarding Ireland.

How Her Majesty’s Government simultaneously manages to meet its Paragraph 49 obligations to the EU, and its Paragraph 50 obligations to the DUP, taking account of inter alia Paragraphs 45 and 46, is something it will have to figure out. The UK government clearly ought to fulfil its commitments to the DUP, but whether it does so or not is hardly a primary concern of the EU. Paragraph 49 is what the EU will care about, not Paragraph 50. (Although Ireland would be very happy if the UK met both obligations in the only way that seems possible, namely by effectively staying in a Single Market and Customs Union type of arrangement with the EU.) If the UK wants to leave the EU in a civilised and amical manner, and strike a trade deal with the EU in the future, it will have to uphold the very clear commitments it has made to the EU. How the British deal with British fudge — whether Mrs May betrays the DUP, or abandons her previous red lines regarding membership of a customs union and the Single Market —  is a matter for them. But sooner or later they are going to be forced to confront and deal with the internal contradictions of their position.