Rates must be cut if businesses are to survive: here’s how it can be done

Radical changes to the motor and property tax systems to benefit local authorities could help businesses recover from the Covid-19 pandemic by reducing their annual rates liability

11th June, 2020
Rates must be cut if businesses are to survive: here’s how it can be done
Civa Connell tries on sunglasses at Brown Thomas in Dublin after it reopened this week. Changes in the rates businesses must pay would assist them as they recover from lockdown. Picture: Leon Farrell/Photocall Ireland

The Covid-19 lockdown has had a devastating impact on many sectors of the economy, including businesses and our local councils.

The forced shutdown of non-essential services has led to many SMEs struggling to pay commercial rates, and in response central government introduced a three-month waiver. At the same time it promised to compensate local councils for this loss of income from non-payment of rates, estimated at €260 million.

Local authorities are also losing revenue from charges on services such as car parking and planning applications due to the contraction in economic activity.

Given that the recession is likely to be severe, what we need in the short-term are contemporaneous changes in taxes on local businesses and revenues of local authorities that will help both the commercial and local government sectors.

One such proposal is a reform of motor vehicle tax (MVT) and local property tax (LPT). Changes to these could guarantee local authorities a steady source of income in the difficult times ahead while simultaneously assisting local businesses and SMEs by reducing their annual rates liability.

Before the local government reforms and the introduction of LPT in the mid-2010s, the MVT was assigned to local rather than central government. It was paid into the Local Government Fund, which in turn allocated monies to local authorities in the form of central government grants, both general-purpose and specific-purpose grants for non-national roads. MVT amounts were about €1 billion a year. The introduction of the LPT and other changes to local government income resulted in a new and improved model of local government finance.

Currently MVT is collected by the motor tax office of the local authorities, but since 2018 it has been paid into the central exchequer for central government spending. As for the LPT, amounting to annual receipts of just under €500 million, 80 per cent is retained in the administrative area from where it is collected and the remaining 20 per cent is pooled and allocated to those local authorities with weaker property bases.

The distribution is based on historical amounts received in 2014. Called the baseline, this is the minimum level of funding for each local authority as determined by the Department of Housing, Planning and Local Government.

My proposal begins with MVT, and receipts of €964 million in 2019. Rather than assign this revenue source to one level of government, the yield should be shared between central and local government on a pre-determined basis. Revenue-sharing arrangements between different tiers of government are not uncommon in other jurisdictions. Revenue sharing of tax receipts on ownership of vehicles is also not uncommon.

Given the nature of motor vehicles, it is not unreasonable for a certain share of the revenue from the tax levied on their ownership to accrue to the local authority where the owner of the vehicle resides. A central feature of any good system of local government is the matching or benefit principle – the linking of the taxes paid with the benefits received. In this case, the motor tax accrues to local authorities and, in turn, is used for the delivery of local services including the maintenance of local and regional roads, traffic management, road safety, street cleaning and so on.

As for the actual share, this is a decision for central government. In my calculations I took a modest 25/75 per cent share, with 25 per cent of MVT receipts accruing to local government on a derivation basis –shared in proportion to the revenue collected in each local authority.

With a 25 per cent share to local government, amounting to €241 million in 2019, this would have translated to a 15 to 17 per cent reduction in commercial rates income needed by local authorities to balance their budgets.

In terms of the Annual Rate on Valuation (ARV), which when combined with the rateable valuation of a property determines the annual ratepayer’s liability, this would amount to a 20 to 25 per cent average reduction in the ARV.

While urban councils, in Dublin and Cork for example, depend more on rates for their annual income and could see a rate cut of 10 to 15 per cent, some smaller rural councils could implement a reduction in the ARV of up to 30 per cent while continuing to maintain local services and manage the local public finances. Whatever the precise cut in the ARV, it amounts to a significant and permanent reduction in the annual rates bills for businesses and SMEs with commercial and industrial properties.

As for the LPT, my proposal involves a change in how the the tax funds local government. Here, the proposal is for a redesign of the LPT that is, on the one hand, simpler and, on the other hand, more transparent.

I propose to replace the current 80/20 per cent split with a 100 per cent retention model where local councils retain the full 100 per cent of LPT receipts from their administrative area. To offset the widening horizontal fiscal imbalances that this will inevitably produce, I propose that central government funds the so-called equalisation or top-up grants. This is the case in many other unitary countries.

In doing so, by separating LPT from equalisation, a less complicated model of local taxation can be achieved. In addition, the use of a new equalisation formula that is both measurable and objective achieves greater transparency, with more equitable fiscal outcomes across the local authorities.

A common methodology used worldwide to distribute fiscal equalisation grants across local councils is the concept of local fiscal capacity and a representative revenue system. In essence, it means allocating equalisation funds based on estimates of revenue-raising capacity or potential revenue, rather than using actual revenue which can have potentially strong disincentive effects on tax collection and local tax bases.

Using this methodology, the formula-determined equalisation fund required for Ireland’s local authorities is about €200 million a year. Similar to the MVT proposal, the combination of retaining 100 per cent of LPT retained with this new vertical equalisation fund would result in less commercial rates income needed – initially budgeted at over €1.65 billion for 2020 – to balance annual local authority revenue and spending.

In turn, the average ARV would be lower but with a very wide variation across the 31 local authorities, with some big winners and also a small number of losers. Careful consideration needs to be given to these distributional changes and how the losing councils can be compensated during a just transition phase.

So, as economists like to warn that there is no such thing as a free lunch, what is the catch with this proposal? The big loser is the central government, as it would have to sacrifice 25 per cent of the annual MVT and/or more than €200 million gross for LPT and equalisation purposes.

Taking the MVT and LPT changes together, the total annual cost of more than €400 million to the central exchequer needs to be weighed up against the combined benefits of a business sector and a model of local government finance that are more stable and sustainable in the current unprecedented business environment.

Although reluctant to use the word desperate, uncertain times call for radical measures, such as the changes to MVT and LPT outlined above. A new government might wish to consider this limited but worthwhile package of tax policy measures aimed at the economic recovery, with potential local and national benefits for our scarred but resilient economy.

Dr Gerard Turley is a lecturer in economics at the School of Business and Economics in NUI Galway. This article was produced with the assistance of Stephen McNena, also a lecturer in economics in NUI Galway.

Share this post

Related Stories

24% decline in gross new lending to Irish SMEs in 2021, Central Bank says

SMEs Eva Short 1 month ago

PUP should be cut faster to get workers back, Isme says

SMEs Donal MacNamee 1 month ago

Popertee to be liquidated due to Covid slump

SMEs Killian Woods 1 month ago

Remote working could enable Irish start-ups to scale at home, Techstars manager says

SMEs Eva Short 1 month ago