Better Means to a Better End: The Recession Diaries - September 14th
In European terms, local taxation in Ireland is almost non-existent. The EU-15 average local tax take is 4.9 percent of GDP; in Ireland its 0.8 percent of GNP. Even Luxembourg, half the size of the Dublin metropolitan area and its population, has a larger local taxation base than all of Ireland. So I was interested to read what the Commission on Taxation had to say on the issue, bearing in mind that a report on local taxation itself could take up 500 pages or more.
Nat O’Connor over on Progressive-Economy noted that, given its reluctance to introduce a property tax, the Government had better have a ‘Plan B’ for local authority financing. Otherwise it risks, as Nat rightly points out, a general degradation of municipal services and local areas while putting disproportionate strain on ever decreasing commercial rate base. Unfortunately, and I may be unduly pessimistic, Fianna Fail will risk just that, so obsessed are they with deflationary policies. Besides, if councils, which are for the most part made up of opposition and independent councillors, take the heat then blame can be shifted or at least mediated.
In any event, the Government can take cover behind the Commission on Taxation Report. For in keeping with its overall revenue-neutral approach at the national level - the Commission recommends no net increase in revenue at the local level. It’s main recommendation - that an Annual Property Tax (APT) be devolved to local government - looks fiscally beneficial at first glance (for local governments, anyway). Except that the Commission recommends that current funding based on motor tax revenue be withdrawn from local government and returned to central funds, leaving local government just as impoverished as before. The only silver lining is that in the future, local governments may be able to adjust the property tax upwards. However, given that the APT is potentially regressive, this is not an option that progressives should get too enthused over.
The problem with local government finance is that it is intricately intertwined with structural reforms and the issue of devolution of powers. The sad reality is that if we aspire to little more than what we have - a local government system rooted in the 19th century, with less powers and responsibility than almost all other European countries, and a managerial-based (rather than democratically elected councillor-based) decision-making process; if that’s all we want, then we don’t have to get too worked up over new financing powers. A bit of tinkering here and there - with some more charges thrown in for good measure should do the trick.
But if we aspire to something more - a modern local government regime, democratically accountable and armed with new powers and responsibility; in other words, an engine for public services, enterprise development and social protection, then we’ll have to think deeply about the best revenue base.
And this means getting over the idea that enhanced local government financing must automatically mean a house property tax. There are other options, namely income tax. I would argue that this could be a more acceptable revenue base. The Commission examined this option briefly and, just as briefly, dismissed it. They should have spent more time on it.
The Commission concedes that a local income tax has considerable strengths:
‘ . . it would be a potentially buoyant source of revenue and would be linked directly to a person’s ability to pay.’
However, they listed a number of objections. Let’s go through each of them to see how they stack up.
‘Locally determined income tax rates are not consistent with national employment policies.’
Why? This cryptic one-line objection clearly needs elaboration but I can see positive examples. Let’s say a local authority increased their income tax in order to employ or train people in depressed areas - how does that undermine ‘national employment policies’? (Actually, I didn’t know we had ‘national employment policies’ - if anyone know about them, please let me know.)
‘A local income tax system would lead to considerable additional compliance costs on employers and on individual taxpayers.’
The original Commission on Taxation considered this issue and concluded that all that was needed would be to establish an address on the tax certificate. They also stated that the Revenue Commissioners would collect the tax on an agency basis and return it to the local authority - so no revenue-collecting duplication. This hardly implies ‘considerable additional compliance costs.’
‘There are difficulties in taxing non-PAYE income, such as investment income and dividends, which would give rise to anomalies. These could prove difficult to address in implementing an equitable local income tax system.’
There’s no difficulty at all. Through a process of negotiation between the combined local authorities and the central government, a tax equivalent to the average local tax liability, could be levied by the Exchequer and returned to the local level as part of an equalisation fund that benefits the more impoverished areas. This would dovetail into the same resolution that applies to the next objection.
‘As an alternative to central government financing, a local income tax would not give an even distribution of income to each local authority given the varying density of population throughout Ireland. Central government would still have to transfer significant resources to provide equalisation of funding to some local authorities.’
This is an odd objection since the Commission acknowledges this problem when discussing devolving a property tax to local areas. To solve it they propose an equalisation fund be established to assist those authorities with higher social-economic need. So, ditto under a local income tax. In principle, no difference.
‘A genuinely local income tax that would possibly be levied at different rates by various local authorities could lead to some taxpayers choosing to live or work in areas where a lower tax rate applies.’
Ditto with a locally determined property tax.
‘It would increase the burden of tax on labour income.’
Indirectly, so does a property tax. For the most part only those in work would pay - and the overwhelming majority people at work own a house in this house-owing democracy of ours.
* * *
There are problems with any new system. But I suspect the Commission didn’t spend much time on the issue of a local income tax. There’s an automatic equation: local government finance = property tax. All I’m suggesting here is that there are alternatives - alternatives deserving of more discussion.
Of course, we could really do the democratic thing and establish a system of both property tax and income tax for local levels. And let local authorities decide - or, rather, let local people decide. They could opt for one or the other, or a combination of the two.
But first we have to debate all the alternatives in depth, assess the local revenue bases and the impact on different incomes. In other words, a lot more study needs to be done.
And complementing that work we will have to start debating what kind of local government we want, its structures and powers. Or whether we’re happy with the status quo. For that will help us determine what reforms we will need in local government financing. If any at all.
We welcome and encourage lively discussion from the public about articles on Irish Left Review. You can leave a comment using the form at the bottom of the page. Please read through the existing comments before posting your own.