Analysis: a simple change to the LPT system could alleviate a number of problematic issues and generate benefits for tax payers

The local property tax (LPT) was introduced in 2013 by a government desperate to raise funds after the collapse of the property bubble in the face of significant public opposition. Unloved but generally accepted, it has been unchanged since its introduction. However, as the third valuation cycle approaches, now is the time to explore its full potential to generate positive social effects by the introduction of a simple change in its operation.

While nobody likes paying tax, it is generally agreed that some taxes are better than others and the LPT falls into the category of a good tax. It is a crude form of a wealth tax, a form of taxation which can reduce inequality while not distorting economic activity. It provides a stable revenue stream, a key motivation for the initial introduction of the LPT. Finally, property taxes are hard tax to evade, resulting in a high compliance rate.

The LPT was introduced in a hurry when raising revenue was of primary importance. As a result of this haste, its implementation is less satisfactory and its potential to impact the property market not fully explored. A key test of any tax is fairness, and the LPT falls short by this criterion. As wealth increases, the primary residence tends to form a smaller proportion of total wealth. Consequently, while lager houses incur more tax, this also tends to be a smaller portion of an individual's wealth.

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From RTÉ Radio 1's Today With Claire Byrne, Katie Clair from the Revenue's LPT branch on a new property tax valuation

In economic terms, it is a regressive tax. Taxes have the potential to change behaviour, and this potential has not been explored in the case of the LPT. It doesn’t distinguish between the use of a property; homes, investments and holiday residences are all taxed on the same basis. A more nuanced approach can encourage the most socially positive use of the housing stock while discouraging uses that contribute to the housing crises.

A simple change can alleviate these issues and maximum benefit from the LPT. Each property is to be given an allowance depending on the number and type of occupants. The allowance will be deducted from the value of the property before the tax is calculated. Its value is tied to the cost of the cheapest properties available, presently €60,000.

The allowance is given to an owner-occupier and other non-rent paying occupants, which in most cases represent a family unit. The first eligible individual receives an allowance of €60,000 and other occupants get half that amount. Under the scheme, an individual living alone receives the base allowance while a family of four pay LPT on property value in excess of €150,000, which ties the allowance to housing need.

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From RTÉ Radio 1's News At One, RTÉ Economic Correspondent Robert Shortt on new measures introduced by Minister for Finance Paschal Donohoe on Local Property Tax valuations

The final step is to raise the rate of the LPT. This will first make the introduction of the allowance cost neutral for the government and also increase the penalty for sub-optimal uses of the housing stock.

The first effect of the reform is to increase the equity of the tax. The amount paid by the least wealthy will fall, average households will stay the same while those living in the biggest houses will pay significantly more. The tax will become progressive.

A second set of effects encourage efficient use of the current housing stock, acting to ease, even in a limited way, the current crisis. For example, the state currently has over 60,000 holiday homes which are empty for most of the year. In an economy desperate for housing stock, this is a poor outcome which has become more significant as the opportunities for remote working has increased. These properties are not eligible for an allowance and so face an increase in tax. Similarly, a given property will be liable for lower tax if occupied by a family compared to an individual. This will discourage under-occupation of properties.

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From RTÉ Radio 1's Morning Ireland, Paul Murgatroyd from DNG estate agents and Helen Gallery from Helen Gallery Auctioneers and Valuers on changes to the Local Property Tax

Finally, demand from investors currently puts significant upward pressure on house prices. The allowance will not apply to rental properties, increasing the tax bill. In turn, this makes property investment less attractive, and reducing price pressure from potential landlords.

This is one possible reform of the LPT, the change with the most potential to generate benefits, but that does not mean others are not possible. The difference between urban and rural prices places a disproportionate burden on city dwellers. An allowance based on the lowest property values in a local authority area rather than nationally can ease the dissatisfaction caused by this anomaly. The allowance can be extended to renters under the rent a room scheme, encouraging a behaviour that effectively increase the supply of property.

Although still unpopular, the LPT is a good tax and should be retained. However, there are opportunities for reform to improve equity and to support the efficient operation of the housing market for the benefit of the general public.


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