Local property tax (LPT) is back in the news, and not just because the payment arrangements for 2018 are being made around now.
Government ministers are signalling that the tax will be changed. Taxes are changed every year in the budget, but what is on the cards now has to be something a bit more fundamental than merely changing a USC rate or an income tax allowance.
Even though there are almost two million properties in the LPT net, the tax yield to the exchequer is relatively small. LPT accounted for less than 1% of all taxes paid in 2017.
It casts a disproportionately large shadow because it affects a large number of people and the money it raises goes towards funding local authorities.
The current LPT problem is that it is based on property valuations taken at their lowest ebb in May 2013. Annual LPT liabilities since then have not taken account of the gradual recovery of the property market.
The next LPT property revaluation is due next year, by which time most residential properties could well see an uplift in value of 50% or more. The tax is calculated on a percentage of the rounded value, so if the only change made is a higher property valuation, people will see their LPT bills increase substantially.
The impact on people’s pockets of the revaluation is not the only problem. An unforeseen problem was the exclusion from the tax of all newly completed properties after May 2013.
In addition the revaluation date was deferred in the run-up to the last general election which also had the effect of increasing the number of new houses excluded.
As a consequence, the Irish cadaster — the register of properties and values on which a tax is based — is now falling out of date. Under the Constitution, it is not valid to levy a tax based on an out of date cadaster. Political considerations aside, the LPT system has to be reformed.
Previously there had been at least three attempts in this country to levy taxes on domestic property — local authority rates, residential property tax and finally the household charge for which local property tax was a direct replacement.
Local authority rates on domestic properties were abolished in a flurry of high politics following the 1977 election campaign, concealing serious operating difficulties with rate collections, mainly to do with property valuations.
The residential property tax introduced during the 1980s had a serious design flaw in that it only applied to houses at the upper end of the market. In effect that made it an urban tax, and operated only for a decade or so.
The household charge was applied but with nothing like the enforcement powers available to Revenue when policing LPT.
There are aspects to LPT which should be retained, such as exemptions for charities, nursing homes and residences for the incapacitated.
There is also a deferral system in place for those on low incomes or those who might be at risk of significant financial loss from paying the tax. In those 60,000 cases every year, the LPT is paid when the property is ultimately transferred or sold.
A redesign doesn’t have to mean an increase. A reduction in LPT rates could counteract the effect of increases in property values. LPT rate reduction should feature in any proposals.
Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland.
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