Local Property Tax: equalization funds, surpluses and Local Authorities use of new tax powers

Patrick Malone

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Key Point:

In 2019 the total Local Property Tax (LPT) yield amounted to €487million. Between the years 2015 and 2019, 21 Local Authorities (LA) experienced funding deficits and required equalization funding. The level of equalization funds allocated to LAs in 2019 was €138m: an increase of €36m, or 35%, compared to 2015. During the years 2015 to 2019, 12 LAs achieved surplus funding. LAs with surplus LPT funds use this funding for discretionary purposes and to self-fund housing and roads services. In 2019, the LPT surplus retained for discretionary purposes amounted to €63m: a slight decrease of €3m compared to 2015. A greater decrease was evident in the balance of surplus LPT funding available to self-fund roads and housing services. In 2019, the balance of surplus available for LAs to self-fund was €109m. This represented a decrease of €44m, or 30%, compared to 2015. A central element of the LPT policy was the power granted to LAs in 2014 to vary the basic rate of LPT by up to 15%. However, to date only a small number of LAs have exercised this power for the purposes of generating additional funds for local services. In 2019, five LAs increased the basic rate of their LPT (between 2.5% and 10%): generating additional revenue amounting to €3m. By contrast, four LAs decreased their LPT basic rate (between -10% and -15%) in 2019, resulting in a loss of €28m in potential revenue. A consistent trend across the years reviewed has been the loss in potential revenue that could have been generated from the residential property tax. In particular, a significant loss in additional revenue for discretionary purposes and to self-fund housing and roads was evident among LAs in the County Dublin region who made the decision to reduce their LPT by up to 15% during the years 2015 to 2019. Residential property prices have increased by 46% nationally and by 37% in the County Dublin region between 2014 and 2018. However, LPT valuations have not been raised. Failure to keep track of property price inflation entails a substantial loss of potential revenue.

Policy overview

The LPT is an annual tax charged on the market value of all residential properties in Ireland. It came into effect on 1 July 2013 and is collected by the Revenue Commissioners. This tax is charged on residential properties, with the owner of a property being liable[1]. The revenue raised is used to fund various services provided by LAs such as: public parks, libraries, open spaces and leisure amenities, planning and development, fire and emergency services, maintenance and cleaning of streets, and street lighting. As a revenue source, the LPT accounted for 10% of total LA income in 2018[2].

LPT: revenue deficits and surpluses between the years 2015-2018

In implementing the LPT, the government decided that 80% of LPT revenue is retained locally to fund public services, while the remaining 20% is used to fund other LAs that do not have a sufficient property base to meet their funding requirements. Furthermore, every LA is entitled to receive a minimum amount of funding from the retention of LPT known as the baseline. Equalization is the process through which all LPT allocations are funded up to this baseline [3].

In the case of LAs with large property bases, additional income is received from LPT compared to their baseline (i.e. minimum funding level needed for that LA to function). LAs use this surplus funding in two ways: 1) retain a portion of the funding for their ‘own use’; 2) use the remainder (if any) to fund services in the Housing and Roads service division areas. This is a process known as self-funding[4].

Table 1 shows the distribution of surpluses and equalization funds during the years 2015, 2018 and 2019. In 2019, the total LPT yield amounted to €487m. This represented a decrease of €13m, or -2.6%, compared to 2015. If we compare the LPT retained locally (i.e. 80% of the total LPT yield) to the LPT baseline, the data suggests that there has been a dramatic fall in total surplus revenue: decreasing from €117m in 2015 to €34m in 2019. This has been due to: 1) the increase in equalization funds required by LAs below the baseline/minimum level of funding required and 2) a decrease in the amount of LA surplus revenue for discretionary funding and self-funding of housing and road services.

Between the years 2015 and 2019, total equalization funding increased by €36m: increasing from €102m in 2015 to €138m in 2019. During these years, 21 LAs were below the baseline/minimum level of funding required. These LAs included: Carlow, Cavan, Donegal, Galway (County Council), Kilkenny, Laois, Leitrim, Limerick, Longford, Louth, Mayo, Monaghan, Offaly, Roscommon, Sligo, Tipperary, Waterford, Westmeath, Wexford, Cork City Council (2017, 2018 & 2019) and Kerry (2017, 2018 & 2019).

In terms of the LPT surplus revenue retained by LAs with a large property base and additional income, there has been a slight fall in the amount of surplus retained for discretionary purposes: decreasing from €66m in 2015 to €63m in 2019. By contrast, a greater decrease is evident in the balance of surplus LPT revenue available to self-fund housing and road services. In 2019, the balance of surplus available for LAs to self-fund was €109m. This represented a decrease of €44m, or 30%, compared to 2015. During these years, 12 LAs were above the baseline/minimum level of funding required. These LAs included: Cork City Council (2015 & 2016), Kerry (2015 & 2016), Clare, Cork, Dún Laohaire-Rathdown, Dublin, Fingal, Galway City Council, Kildare, Meath, South Dublin and Wicklow.

Table 1: Distribution of Surpluses and Equalization Funds during the years 2015, 2018 and 2019 (Million) [5]

Source: Department of Housing, Planning and Local Government (2015, 2018b and 2019)

LPT: LAs use of the power to increase/decrease basic rate of LPT by 15%

From the 1 July 2014, all LAs were granted the power to vary the basic rate of LPT by up to 15%. In the case of LAs that decide to increase the LPT rate, the full amount of additional LPT collected is retained by those LAs. If a LA decides to reduce the LPT rate, the full cost of that reduction is reflected in a decreased LPT allocation to that LA.

Table 2 shows the LPT Adjustment Factor Variation (LAFV) rates during the years 2015, 2018 and 2019. In 2015, the total LPT funding provided pre-variation was over €500m. During this year, 17 LAs resolved to introduce ‘no change’ to the LAVF rate. These LAs retained the total LPT funds provided pre-variation which amounted to €195m. While no LA increased their LAVF rates in 2015, 14 LAs resolved to reduce their LAVF rates (between -1.5% and -15%). The loss in potential revenue for LAs with a negative LAVF rate was €43m, with total LPT revenue allocated post-variation in 2015 amounting to €460m.   

LPT funding provided ‘pre-variation’in 2018 was €527m: an increase of €25m on 2015. In 2018, 20 LAs opted to introduce ‘no change’ to the LAVF rates:  with those LAs retaining total LPT funds amounting to almost €260m. By contrast to 2015, 7 LAs resolved to increase their LAVF rates (at a rate between 2.5% and 10%). This provided over €5m in additional funding to these LAs combined. Furthermore, only four LAs resolved to reduce their LAVF rate in 2018, at a rate between -10 and -15%.This represented a combined loss of €28m in potential revenue for these LAs. The total LPT allocated post-variation in 2018 was €504m: with the total loss in potential LA revenue amounting to €23m.

Similar trends are also evident in 2019. In 2019, 22 LAs decided to introduce ‘no change’ to LAVF rates: an increase of 5 LAs compared to 2015. The total revenue retained by these LAs combined amounted to almost €300m. There continues to be a comparable number of LAs resolving to increase or decrease their LAFV rates: with five LAs opting to increase their LAVF rate (between 2.5% to 10%) and four LAs deciding to decrease their LPT rate (between -10% and -15%) in 2019. The additional revenue received by LAs with a positive LAVF rate amounted to €3m. LAs with a negative LAVF rate experienced a loss of €28m in potential revenue. The total LPT allocated post-variation in 2019 was €503m: with the total loss in potential LA revenue amounting to €24m.

Table 2: Local Property Tax Adjustment Factor Variation during the years 2015, 2018 and 2019 (Million) [6]

Source: Department of Housing, Planning and Local Government (2015, 2018b and 2019)

Summary: Impact of LPT as a LA revenue source

A consistent trend across the years reviewed has been the loss in potential revenue that could be generated from the residential property tax. While a substantial number of LAs experiencing funding deficits received equalization funding between the years 2015 and 2019, less than half of these resolved to increase the LVAF to generate additional revenue.

A significant loss in additional revenue for discretionary purposes and to self-fund housing and roads was also evident among LAs who made the decision to reduce the LVAF rate. LAs in the County Dublin region (Dublin City, Dún Laohaire-Rathdown, Fingal and Dublin South) in particular, were the most consistent in achieving funding surpluses (due to the large property base) and in reducing their LVAF rate by 15% between the years 2015-2019[7]. The decision by these LAs to reduce their LVAF rate resulted in a dramatic loss of potential revenue amounting to over €87m across the five years 2015 to 2019.

The opportunity to gain additional revenue becomes more apparent when we compare the base price for residential properties established for the LPT in 2014 with the current market value of residential properties and rising inflation. Recent data from the CSO (2019) shows that residential property prices nationally (excluding the Dublin region) have increased by 46% between the years 2014 and 2018. Similar trends are also evident in the County Dublin region, where residential property prices have increased by 37% between the years 2014 and 2018. This significant increase in the value of residential properties, both nationally and in County Dublin, raises important public policy concerns surrounding the appropriateness of the current LPT baseline which determines the value of residential properties and the tax to be paid by homeowners and which is not adjusted to take account of changes in property values.


[1] Note: In the case of leases agreed with tenants over twenty years, the tenant becomes liable.

[2] See Malone, P. (2019) Local Authority Finance: Income and Expenditure Trends [Online] Available at: http://publicpolicy.ie/papers/local-authority-finance-income-and-expenditure-trends/

[3] The baseline is historically linked to funding previously received by a LA from the Local Government Fund as a General Purposes Grant and to the levels of Pension Related Deductions retained by a LA. Effectively, the LPT allocations replaces both of these previous sources of funding provided to LAs (Department of Housing, Planning and Local Government, 2018a).

[4] The portion retained as a surplus by LAs for their ‘own use’ is an amount equal to their individual baseline (minimum level of funding required) plus 20% of the total expected LPT income in their respective areas (before any to decision to vary LPT rates by +/- 15%) or in the case where the surplus is less than 20%, the full amount.

[5] Note: Due to rounding, numbers presented in this table may not add up precisely to the totals provided. For a detailed breakdown on a per LA basis see Appendix 1.

[6] Note: Due to rounding, numbers presented in this table may not add up precisely to the totals provided. For a detailed breakdown on a per LA basis see Appendix 2.

[7] Note: While Fingal County Council reduced their LPT rate by 15% in years 2015, 2016 and 2017, the LA resolved to reduce the LPT rate by 10%
in 2018 and 2019 .

References

Central Statistics Office (2019) Residential Property Price Index [Online] Available at: https://www.cso.ie/px/pxeirestat/Database/eirestat/House%20Prices/House%20Prices_statbank.asp?SP=House%20Prices&Planguage=0

Department of Housing Planning and Local Government (2018a) Local Authority Budgets 2018 [Online] Available at: https://www.housing.gov.ie/search/archived/archived/archived/current/type/publications?query=Local%20Authority%20Budgets

Department of Housing Planning and Local Government (2019) Local Property Tax Final Allocations to Local Authorities for 2019 [Online] Available at: https://www.housing.gov.ie/housing/chargestaxes/local-property-tax/local-property-tax-final-allocations-local-authorities-2019 

Department of Housing Planning and Local Government (2018b) Local Property Tax Final Allocations to Local Authorities for 2018 [Online] Available at: https://www.housing.gov.ie/housing/chargestaxes/local-property-tax/local-property-tax-final-allocations-local-authorities-2018

Department of Housing Planning and Local Government (2017) Local Property Tax Final Allocations to Local Authorities for 2017 [Online] Available at: https://www.housing.gov.ie/housing/chargestaxes/local-property-tax/local-property-tax-final-allocations-local-authorities-2017 

Department of Housing Planning and Local Government (2016) Local Property Tax Final Allocations to Local Authorities for 2016 [Online] Available at: https://www.housing.gov.ie/housing/chargestaxes/local-property-tax/local-property-tax-final-allocations-local-authorities-2016

Department of Housing Planning and Local Government (2015) Local Property Tax Final Allocations to Local Authorities for 2015 [Online] Available at: https://www.housing.gov.ie/housing/chargestaxes/local-property-tax/local-property-tax-final-allocations-local-authorities-2015 

Appendices

Appendix 1: Distribution of Surpluses and Equalization Funds (by Local Authority) during the years 2015, 2018 and 2019 (Million)

Source: Department of Housing, Planning and Local Government (2015, 2018b and 2019)

Appendix 2: Local Property Tax Adjustment Factor Variation (by Local Authority) during the years 2015, 2018 and 2019 (Million)

About author

(patrick.malone@ucd.ie)