Analysis: just what do the alphabet soup of terms and acronyms around the local property tax actually mean?
Anyone trying to understand property taxes must be puzzled by the increasing appearance and use of acronyms, such as ARV, LPT, LAF and more recently VSL and SVT. So, what do these acronyms mean, and how can they be decoded? Here is a brief guide to the alphabet soup of property taxes in Ireland's system of local government.
Let's begin, though, with the economic rationale for property taxes, and in particular, the local property tax (LPT). Introduced in 2013, it is a recurring tax on the value of residential properties. Valuations are self-assessed, currently based on a valuation date of May 1st 2013. As property prices have increased sharply since then, revaluations for the purposes of LPT have been deferred. Although LPT receipts accrue to local councils, they are collected by the Revenue Commissioners with a pre-determined share (20%) pooled for equalisation purposes i.e. urban-based local authorities with strong property bases partly fund smaller rural local authorities with financially weaker property bases.
In the new programme for government, there are commitments not to increase local property tax liabilities for most homeowners and to widen the tax base by including currently exempted new homes. There is also a commitment to allow local authorities to retain all LPT receipts collected locally, while compensating councils that have small LPT bases with centrally funded equalisation grants.
From RTÉ Radio 1's Morning Ireland in April 2019, Minister for Finance Paschal Donohoe on why changes to the Local Property Tax are to be deferred for another year
Often cited by taxpayers and the media as an unpopular tax because of its salience and the difficulty in avoiding or evading liability, the property tax is considered by the economics profession as a 'good’ tax as it distorts economic activity and the behaviour of economic agents less than other major taxes. Furthermore, a tax on residential and commercial property is viewed as a good local tax as it is immovable i.e. it cannot move, and, thus, local governments can be confident of a stable source of revenue income over time. To fulfil the definition of a local tax, the local authorities should have some autonomy over the tax base or tax rate. In Ireland’s case, the local authorities have rate-setting powers for both commercial rates and taxes on residential properties.
To enhance local democracy and accountability, it is the local councillors rather than the executive that set these rates. It is these two property taxes that are the source of the mysterious acronyms of ARV, LAF, LPT, SVT and VSL. As we all know, taxation is not a subject renowned for its simplicity or use of jargon-free language. The use of these acronyms further confuses and frustrates citizens so good communication and effective messaging should not be underestimated.
ARV: Annual Rate on Valuation
This is essentially the tax rate applied to commercial and industrial properties. It is set annually by the elected members of a local authority, at the annual budget meeting. Although councillors have powers to determine the ARV, it is limited by the fact that the accrued commercial rates must make up the shortfall between the estimated spending on local services and the other sources of income, namely, charges, local property tax and central governments grants. Each rateable property has a rateable valuation determined by the independent Valuation Office. For a ratepayer, the rates bill is calculated by multiplying the ARV by the rateable valuation.
From RTÉ Radio 1's Morning Ireland, architect and policy commentator Mel Reynolds on why there should be more transparency about how the Local Property Tax is used
There are large differences in the ARV across the 31 local authorities, partly reflecting disparities in the economic base of localities, but also the large variation in local council spending per resident. In turn, this reflects differences in the circumstances, preferences and socio-economic profiles of local areas. In essence, this is the economic case for local government as against a national government that provides uniform services and a tax rate determined centrally.
LAF: Local Adjustment Factor
The LPT rate is set by central government at 0.18% for properties valued up to €1m and 0.25% on the portion of the value above €1m. However, individual councils have the power to increase or decrease this base rate by 15%. This is an annual decision and must be relayed to Revenue by the end of September every year, to ensure the budget process can be completed before the start of the next financial year. With these powers, the local council is more accountable to the electorate and local taxpayers.
While the use of the LAF was very limited in the initial years, we have seen a wider application of these powers more recently. For example, three of Dublin's four councils have reduced the central rate by the full 15% since 2015, while Fingal County Council voted for a 10% reduction between 2018 and 2020. Although a manifestation of local democracy, these tax cuts to owners of residential properties in a time of a local authority housing crisis have been controversial and subject to a lot of valid criticism.
VSL: Vacant Site Levy
This was first introduced in 2018 to encourage developers to build more houses and apartments and ensure greater affordability in the property market rather than hoard land. Initially set at 3% of the market value of a vacant site, the rate was increased to 7% in 2019, to further incentivise the development of idle land.
From RTÉ Radio 1's Drivetime, Fergal Keane goes on a tour of vacant sites in Dublin with TU Dublin's Lorcan Sirr
But there have been many problems with the VSL and its implementation. These include difficulties with the vacant site registers arising from the interpretation of what constitutes a vacant site, the identification of ownership, the appeals process and staff resourcing issues for the local authorities. As of the end of 2019, only four local authorities had collected payments under the levy, amounting to less than €1m. While a recent review of the VSL by the Parliamentary Budget Office recommended a more centralised approach to the administration of the levy, the new programme for government promises to strengthen enforcement of the VSL.
SVT: Site Value Tax
This is similar to Henry George's famous land value tax which is designed to encourage economically productive activities and discourage land speculation. It is considered by many as the best form of property tax as it is a tax on the unimproved value of land which is in fixed supply. Despite its apparent advantages, examples of site value taxes worldwide are few, with only a small number of countries, regions and cities levying the tax. In Ireland, previous Commission on Taxation reports and Inter-departmental reviews of property tax recommended the market value of properties over the value of the land as the preferred basis of assessment, often because of the practical difficulties associated with the implementation of a site value tax.
Although there is a strong rationale for a land or site value tax, the reasons often given for its rarity are the pragmatic obstacles in valuing land or residential sites and the associated and not inconsiderable informational requirements involved. A more substantive reason may be government opposition to land taxes, whether because of the lobbying power of landowners and developers, or a historical affinity to land ownership and its uses, or a reluctance to interfere with private property rights. Although considered by many as a better tax than the current LPT, some of the reasons above may explain why it is not included in the new programme for government. We will have to wait and see if a SVT is included in the terms of reference for the new Commission on Welfare and Taxation.
These are taxes only related to property, and usually assigned to local government. There are many other acronyms pertaining to tax, including VAT, PRSI, CGT, CAT and USC. If death and taxes are the only two certainties in this world, then tax acronyms are here to stay.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ