Nat O'Connor: There is a need to shout from the rooftops that promising tax cuts and tax breaks is not the only way to stand for election or to boost economic activity. But opinions on tax vary, and the electorate will decide. However, it is perverse and anti-democratic that some local council candidates who make populist promises to reduce local property tax (LPT) may be able to pass the loss of budget to smaller neighbouring local councils!
On 24 October 2013, Minister Phil Hogan told the Dáil that "the Minister for Finance will pay into the Local Government Fund an amount equivalent to the Local Property Tax paid into the Central Fund during that year ... The Government has indicated an intention to move to 80% retention of all Local Property Tax receipts within the local authority area where the Tax is raised. ... [but] it has been necessary to defer defining a certain proportion of the proceeds of the Local Property Tax to be retained in each local authority until 2015. This approach allows maximum flexibility in allocating Local Property Tax in 2014 with the priority to support those local authorities with weaker funding bases."
We need to unpack this. In theory, LPT was to be divided up 80:20, with 80 per cent to the authority collecting the tax and 20 per cent to the local government general purpose grant, which acts as a pool of money to support councils with less advantages and weaker funding. However, subsequently (December 2013), Minister Hogan clarified that this 80:20 split may not happen. The reason for this seems to be the late realisation that an 80:20 split would give Dublin and other large councils much more money than at present, and smaller council areas much less.
Preliminary data from Revenue on the LPT shows that, for example, Dublin City collected €39.7 million of LPT. But it has been reported that Dublin City received much less of this money (on a per person basis) than rural council areas. In fact, based on the reported figure of €5.06 per person for Dublin City from the local government fund, and a population of roughly 500,000, Dublin City only received c.€2.5 million (or 6.4 per cent) out of the near €40 million it collected. Other reports are that Dublin received just €2 million.
Minister Hogan also said in October 2013 that "I expect the Local Property Tax to have multiple benefits, including a more sustainable and resilient system of funding for local authorities and therefore a sounder financial footing for the provision of essential local services; greater local scope for financial decision-making concerning service provision - in particular, the inclusion of the local variation mechanism will further increase the autonomy of local authorities; and a strengthening of democracy at local level with a more active relationship between local authorities and local electorates. A stronger democratic relationship and clearer lines of accountability can only have a beneficial impact on service provision from the perspective of the service user."
However, the reality of the LPT allocation system that has been created is that election candidates in Dublin City (and other large councils with high property tax yields) can promise to reduce LPT, accepting that their council will lose some funding, but sure in the knowledge that much deeper losses will occur in smaller, rural council areas.
Based on the above figures, a 10 per cent reduction in LPT in Dublin would reduce its tax yield from €39.7 million to €35.73. But if Dublin only got €2.5 million out of €39.7 million, it will only get €2.2 million out of the lower amount (a loss of just €300,000). But the local government fund would lose a further €3.7 million, which will have a disproportionately large effect on the budgets of smaller local authorities.
Given the maths involved, even if the 80:20 split was adhered to, this perverse consequence would be still be significant.
This makes a mockery of the suggestion that local democracy and accountability will be enhanced by the variation of local property tax. Instead, council candidates in larger council areas can promise tax cuts that will be imposed through lost services in other council areas, even if candidates there take the unpopular stance of maintaining or increasing property tax rates.
Not only is there little incentive for local council candidates in larger areas to defend property tax, but in another perverse consequence of the system, candidates in small rural council areas can (to a lesser extent) promise to cut the LPT there, as long as property tax keeps on being paid in Dublin City and other large councils and transferred to their area through the local government fund.
If LPT cuts are introduced by newly elected councils, the Minister should ensure that the cuts are fully applied to those councils' budgets. However, the loss of LPT revenue from large councils would mean that the Government would have to find other money (from general taxation) to make up the loss to the local government equalisation fund. This defeats the Minister's stated goal of building up sustainable and resilient funding for local services.
Real democratic accountability and sustainable local services will only be possible when there is a coherent, complete system for funding local government, which forces candidates to take responsible positions for the totality of local taxation raised to pay for local services in their areas.
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