As a member of the EU, the eurozone, and the OECD, Ireland does not lack for European economists to review the fiscal and expenditure decisions of our Government, and at times comment, recommend, and even insist on changes.
Being recent recipients of a Troika bailout merely adds to the level of scrutiny which must be suffered, an imposition which I suspect the outgoing Minister for Finance Michael Noonan won’t miss at all.
The latest recommendations from the EU Commission published last week seems at first glance to be bland and aspirational. Prioritising public investment in transport, water services, and innovation in particular in support of the small and medium size businesses could feature in the manifesto of almost any political party. It’s only when you drill into the analysis behind the recommendations that you realise what they’re really after.
The narrowing of the tax base (which involves fewer people paying more) which has taken place in Ireland over the last few years seems to be a real problem for the Commission. Yet, rather than discussing income tax or the Universal Social Charge, they focus their attention on property taxation, which they say “is considered to be one of the most growth-friendly revenue sources”. The EU has been pushing this line for at least the last five years without producing too much research evidence to back the claim. The Local Property Tax (LPT) may be “growth-friendly” but it is still a tax paid by householders out of already taxed income.
The property tax receives disproportionately more attention than the amount collected. It accounts for less than 1% of all taxes collected. Despite the paltry yield, one of the last acts of the previous coalition, in 2015, was to kick a scheduled revaluation down the road to 2019.
The property tax remains highly politically sensitive and only a very brave finance minister would seek to put it, or its first cousin, water charges, back on top of the domestic political agenda. Unburdened by political sensitivities, the EU recommendations can overlook such considerations. The Commission points out that Irish revenues from immovable property lag behind EU averages but just because this country fails to meet an EU average in any particular category doesn’t mean that the policy is wrong. More reasonably, they say that a gradual indexation of property values would help to “smooth the local property tax profile” by preventing a sudden increase in tax liabilities when properties are revalued in 2019.
People will undoubtedly get a shock when they see their LPT bills after the 2019 revaluation. Property tax is currently paid relative to property values as they stood in 2013 when property prices were pretty much at their nadir. According to the CSO, property prices across the country have since increased by about 50%. Because property tax is calculated as a straight multiple of the property value, most of us can expect to see our LPT bills go up by at least 50% from 2019. Anyone who bought new property since 2013 will find themselves paying the tax for the first time based on these 2019 valuations.
Nor does Government have much scope to defer the evil revaluation day. The existing revaluation deferral to 2019 already leaves the property tax open to constitutional challenge. Irish case law has already established that Government cannot levy a property tax based on out-of-date valuations. I think there is an increased likelihood of a successful constitutional challenge to the current system of property tax were the valuation date to be extended even further.
The Commission’s recommendation isn’t just another economics report that Government can merely ignore. The next finance minister might need to have his excuses ready. The Commission says that the Local Property Tax doesn’t collect enough. The Constitution says that property tax can’t continue in its current form because out-of-date valuations are unjust.
The amount we pay in the property tax is going to change. It looks like the only way is up.
Brian Keegan is director of public policy and taxation at Chartered Accountants Ireland
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