It’s a tax that creates a lot of smoke with surprisingly little fire. It’s the tax with one of the lowest yields.
We know from the Spring Statement that the minister will have between €600m and €750m to spend in tax cuts.
The local property tax brings in around €500m, so he could abolish it entirely and still have spare change.
Many of us are now concerned about the next time we have to value our property, because property values are increasing. As they increase, so too does the local property tax payable.
The jump in the local property tax (always presuming property prices continue to increase) will be in 2017, when any increase in values between 2013 and 2016 have to be reported to Revenue.
Before 2017, all the local property tax paid is based on 2013 values, irrespective of whether those values have increased.
For some of us though, while there would be an impact on the local property tax in 2017 from the rising values, the impact might not be as great as you would think. That’s because most of us pay local property tax based on bands of house value, and not the precise cost of our house.
Most people have declared property values of less than €250,000, and the rungs of the local property tax ladder go up in steps of €50,000. So it’s not just about the percentage increase in value of the property, but the rung of the ladder where you land.
For instance a 10% or 15% rise might not be enough to change the rung you’re on for tax purposes, so your bill would stay the same.
However, an analysis of property data from the CSO in this newspaper earlier in the week highlighted the uneven price increases across the country.
Some property values will rise much more than 15%. Undoubtedly some of us will be stung, and we’d all like to know by how much. That’s part of the reason for the review of local property tax which is underway.
It must consider “achieving relative stability, over the short and longer terms, in local property tax payments”. Ideally, we don’t want to be stung at all.
However, I don’t think the minister will consider abolishing the tax. There are several reasons he might want to keep it. Even if the yield is relatively low compared to the other taxes, it is stable and predictable.
The compliance rate is very high, and it’s well enforced. The yield from other property taxes, especially stamp duty, is not predictable. From the Exchequer viewpoint, the local property tax is money in the bank.
Local property tax compliance is also helping the Revenue enforce tax compliance generally. It has provided Revenue with access to a range of information and tax-collection methods that they might otherwise not have had.
Because of this, local property tax compliance is having a significant positive knock-on effect on overall income tax compliance levels.
As one tax inspector put it to me, it’s hard to hide a house. Revenue can match up income tax records and local property tax records, and join the dots if they think something might be missing.
Revenue also has power to direct employers and state agencies to pay over local property tax directly to it. Agencies like the Department of Social Welfare and the Department of Agriculture can be told to collect the tax from benefits and subsidies, if the recipient hasn’t paid their tax as they should have.
It’s all pretty tough stuff. Nearly 61,000 people are having compulsory deductions from their wages or pensions.
Some 19,000 of the self employed have suffered a surcharge on their income tax payments, because they hadn’t met their property tax obligations. No wonder compliance rates are 90%+.
The minister has a few options if he wants to adjust the local property tax to deal with the rising property market. The simplest one would be to continue the system of deemed 2013 values beyond 2016.
People wouldn’t have to declare for 2017 their estimates of the market value of their property, or worry about the uplift in values since 2013. The tax would stay the same. This mightn’t be the safest option to take from the Government’s point of view though.
There is a constitutional question over attempts to collect monies based on out- of-date information. In one of the very few court cases where a taxpayer was successful in challenging a tax on constitutional grounds, a major issue was if it was fair to levy rates based on out- of-date property valuations.
Another option is to adjust the tax rates at which local property tax is charged, while ensuring valuations are kept up-to-date. Local property tax is charged at 0.18% on valuation bands up to €1m, and 0.25% on the value over €1m.
This would also provide Mr Noonan with the scope to adjust the amounts of tax collected on more expensive properties while perhaps leaving the tax on cheaper properties unchanged.
Most of us might not end up paying much more in 2017 than we do at present, but I don’t think those local property tax bills are going away any time soon.
Brian Keegan is director of Taxation with Chartered Accountants Ireland.