Across the country, homeowners have been receiving letters from Revenue reminding them to file a Local Property Tax (LPT) return in the coming weeks.
This involves making an updated valuation of their property that will determine their LPT liability for the next five years.
With house prices nationally having increased by 30 per cent since the last valuation in 2021, homeowners might be expecting a Halloween fright in the form of a much larger tax bill.
Instead, reforms announced by the Department of Finance earlier this year will see more than 90 per cent of properties stay in the same valuation band. Together with a cut in the rate of tax applied to these bands, most homeowners will see a negligible increase in their bill. This follows similar changes in 2021 which cut or froze the tax paid by most homeowners.
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The effect of these reforms has been to gut the LPT as a meaningful contribution to the public finances.
Consider that the LPT raised almost €500 million per year in the years after it was introduced in 2013. Despite house prices having more than doubled and the addition of over 100,000 units to the housing stock, the LPT is forecast to raise just €600 million next year: €300 per property on average.
This means receipts from the LPT have fallen over the last decade from 0.85 per cent to 0.43 per cent of total tax revenues, and from 0.33 per cent to 0.17 per cent of economic activity.
Although this gutting of the LPT may be welcomed by many homeowners, the consequence is that we are instead raising a larger share of revenue from more economically damaging taxes, like income tax, PRSI and VAT.
Such taxes inevitably affect the incentives that individuals have to work, save or invest. As a result, they impose economic costs: for example, discouraging someone doing an hour of overtime or from investing in their – or someone else’s – business.
By contrast, property owners have limited options to reduce their LPT liability. The LPT is therefore far less economically damaging than almost any other tax the Government levies.
Raising less tax revenue from the LPT and more from other taxes means that the economic costs of taxation are much higher than they need be.
This is compounded by our predilection for taxing the construction of new housing through VAT and development levies.
Such taxes raise the price at which new housing must be sold or rented to cover costs, including a return for developers. As a result, they contribute to making some projects unviable at the prices homebuyers and renters can afford to pay, suppressing the supply of much needed housing.
While the recent budget announced a cut in VAT on the construction of new apartments, there is a good case for more radical reform.
Research by my colleague at Trinity College Dublin, professor Ronan Lyons suggests that housing construction in Ireland is highly responsive to costs. Scrapping development levies and applying a zero rate of VAT on all new residential properties would therefore act to boost housing construction which remains far below the 60,000 plus units we need to build each year.
Replacing the lost revenue with a higher LPT levied on all residential properties would shift the taxation of residential property away from new builds and towards the existing stock of housing.
Concerns about the effects of increasing the LPT on the small number of low-income homeowners living in expensive houses could be dealt with by expanding the existing system of deferrals. This already allows for the full deferral of the tax until a property is sold for couples with income below €30,000 per year or on broad hardship grounds.
Shifting the burden of taxation towards the LPT would also improve the fairness of our tax system more generally, which is highly biased in favour of homeowners.
The most egregious example of this is the way that gains realised from the sale of an owner-occupied house are favoured above all else.
Take a house bought for €290,000 in 2012: the average price paid for a property in Dublin at that time. If sold today, the CSO’s property price index suggests such a property would fetch almost €750,000.
An equivalent gain of €460,000 from a successful investment in a business or the stock market would face a Capital Gains Tax (CGT) bill of about €150,000 – more if the investment was through an exchange traded fund.
However, this gain is completely exempt from CGT if realised from the sale of owner-occupied housing, with no limit on the value of the property or gain that can qualify.
As well as acting to boost the demand for – and so the price of – housing, such preferential tax treatment reinforces intergenerational and geographic inequality, with the largest gains accrued by older generations who happened to buy in areas where prices subsequently soared.
This underscores the need for a better approach to the taxation of housing. An integral part of that is a more substantial LPT, raising a multiple of what it does today.
Increasing the LPT would also indicate the Government is finally getting serious about ending our dangerous reliance on corporation tax receipts that cannot last forever.
Just this week, the Irish Fiscal Advisory Council warned that these receipts could be even more concentrated than previously thought, with payments by US multinationals accounting for €20 billion of the €24 billion raised in 2023: about a fifth of overall tax revenues.
This reliance leaves us dangerously exposed to the whims of Donald Trump and the vagaries of US politics. Ending that reliance requires increasing other taxes.
The LPT should be the first to go up.
Barra Roantree is Director of the MSc in Economic Policy at Trinity College Dublin. He was a member of the last government’s Commission on Taxation and Welfare.
