Could a redesigned property tax improve local public services?

Opinion: a new model would provide for a local government funding model that is more objective, sustainable and equitable

By Gerard Turley and Stephen McNena, NUI Galway

On the first day of summer 2021, the government signalled changes to the Local Property Tax (LPT) in line with the Programme for Government. Those commitments were to ensure that most homeowners will face no increase; bring new homes which are currently exempt from the property tax into the taxation system and allow all income collected locally be retained within the administrative area.

Changes will involve a revaluation of residential properties, a change in the bands and the basic rate, and 100% retention of property tax receipts by local authorities with the shortfall made up by central government. Much of the attention will be on the new valuations and liabilities, but our focus is the plan by Government to directly compensate less well-off local authorities so that their residents are not disadvantaged in their access to local public services.

We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences

From RTÉ Radio 1's Morning Ireland, Lorcan Sirr from TU Dublin on changes to the Local Property Tax scheme

At present, different local authorities have stronger or weaker abilities to raise revenue, depending on levels of economic and commercial activity. A system of grant transfers to weaker local authorities is required to reduce these so called horizontal fiscal imbalances. This is known as fiscal equalisation and is a natural complement to fiscal decentralisation. The introduction of the LPT meant a need for a well-defined equalisation system to offset the greater revenues accruing to local authorities with the largest tax bases.

Currently, Ireland's fiscal equalisation model is tied to the property tax, and the General Purpose Grants that councils received in 2014 when those payments were discontinued. With the central government deciding that no local council would be worse off from the new property tax than what they received from the general purpose grant in 2014, a decision on the size of the equalisation pool and the allocation method was made.

With a predetermined share (namely 20%) of the property tax yield pooled to fund the equalisation pot, equalisation transfers are based on the difference between the tax retained locally and the 2014 general purpose grants payment. In this model, funding goes from the well-off local councils (mainly the four Dublin local authorities and other urban areas) to the less well-off local councils, most of which are rural, small local authorities.

From RTÉ Radio 1's News At One, Minister for Finance Pascal Donohue discusses changes to the property tax scheme

The result of this model is that 20 local authorities receive equalisation payments, totalling €133m in 2021. Four local authorities receive over 40% of the total, namely Tipperary, Donegal, and Mayo county councils and Waterford City and County Council. Per capita, Leitrim, Longford and Monaghan county councils receive the largest payments, with these equalisation grants accounting for 12-17% of their revenues.

In designing a more equitable and transparent model not tied to historical baseline supports or the property tax, we examined fiscal equalisation models in other countries. Elsewhere, equalisation models are based on estimates of fiscal capacity and/or expenditure needs. Given the abortive experience of an earlier needs and resources model, the difficulty in assessing expenditure needs, and the relatively homogenous nature of Irish local authorities, we selected a revenue equalisation model based on fiscal capacity which is commonly defined as the potential ability of local authorities to raise own-source revenues.

The advantage of using potential rather than actual revenue is that the latter may incentivise local governments to raise less revenue in anticipation of higher transfers or grant funding. Here, equalisation transfers are based on the difference between the fiscal capacity of a local authority and a predetermined standard, defined as the average of the fiscal capacity estimates.

From RTÉ Radio 1's Morning Ireland, auctioneers Paul Murgatroyd and Helen Gallery on what changes to the Local Property Tax will mean

In our model, the distributable pool is close to €210m. Although larger than the existing fund, it is still smaller than equalisation funds in many other OECD countries. In our simulations, 22 local authorities are eligible for equalisation grants, with the largest amounts to Donegal, Galway, Meath, Laois, and Wexford county councils. Although Leitrim and Longford county councils are eligible for less funding under this model, they still receive more per capita than most other local authorities.

Given the highly political nature of fiscal equalisation, any new redistributive scheme will inevitably result in losers and winners. Although the proposed annual cost is higher than the current allocation, it must be remembered that unconditional grants to local authorities amounted to €1bn at the peak of the general purpose grants.

The biggest winners per head of the population served are Galway, Laois, Meath and Wexford county councils. As for the sensitive issue of the losers, alternative sources of funding include higher taxes locally levied on commercial and/or residential properties, or in cases where it is deemed necessary, a temporary transition payment from the central government. Either way, this new model provides for a local government funding model that is more objective, sustainable and equitable.

Read more by the authors on fiscal equalisation here

Dr Gerard Turley and Dr Stephen McNena are lecturers at the J.E. Cairnes School of Business and Economics at NUI Galway.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ

More stories on