Mr. John Hogan:

I thank the committee for the invitation to address it. I am accompanied by my colleagues Ms Anna Donegan, Mr. John Palmer, Mr. Kevin Nolan and Mr. Faris Bader, who are all from the Department of Finance. My understanding is that the committee wishes to discuss the revaluation of properties for the purposes of the local property tax, LPT, and the yield from the increase in stamp duty on non-residential property. My statement will address each of these in turn.

The LPT is an annually recurring tax applying to most residential properties owned on a specific liability date. The tax is currently linked to the market value of the property as at 1 May 2013. The legislative basis for LPT is the Finance (Local Property Tax) Act 2012, as amended. The Revenue Commissioners have operational responsibility for the administration of the LPT and the tax has been collected by the Revenue Commissioners since it commenced. This continues to be the case. Between 2014 and the end of last year, Revenue remitted LPT to the Exchequer and an equivalent amount was paid over to the local government fund by the Minister for Finance for onward distribution to the 31 local authorities by the Minister for Housing, Planning and Local Government. As of the start of this year, the Revenue Commissioners are remitting LPT directly to the local government fund under reforms provided for the Water Services Act 2017. The Department of Housing, Planning and Local Government has responsibility for LPT allocations to local authorities from the local government fund.

The local property tax has broadened the domestic tax base and provided a new source of revenue for local authorities to replace some of the revenue from transaction-based taxes with an annual recurring property tax. Our reliance in the past on transaction-based taxes proved to be an unstable foundation for Government revenue. In contrast, the experience internationally has been that property taxes provide a stable and secure source of funding. The LPT is producing a stable revenue yield for local authorities, although both yields and rates are modest by international standards. The charging structure for LPT is progressive. The basic rate of 0.18% applies up to property values of €1 million with a higher rate of 0.25% applying on the portion of value above the €1 million threshold. At the end of 2017 and since its inception, LPT has contributed over €2 billion to the funding of local authorities.

From 1 January 2015, elected members of local authorities have had discretion to vary the LPT rates by plus or minus 15%. If a local authority decides to reduce the LPT rate, it forgoes the equivalent amount of the reduced LPT yield from its allocation. If a local authority votes to increase the LPT rate above the basic rate, it receives the full amount of the increased yield. We understand that seven local authorities voted to increase their LPT above the basic rate in 2018 and that four have decided on a reduced rate.

The introduction of the LPT in 2013 was the largest extension of self-assessment in the history of the State, with over 1.3 million taxpayers obliged to file LPT returns and pay the tax in respect of around 1.9 million properties. The first valuation date was 1 May 2013. The valuations declared for that date determined tax liabilities for 2013 - a half year - 2014, 2015 and 2016. The Finance (Local Property Tax) (Amendment) Act 2015 gave effect to the postponement of the revaluation date of residential property for LPT purposes to November 2019. The postponement to November 2019 of the revaluation date for LPT means that homeowners were not be faced with significant increases in their LPT for 2017, 2018 and 2019 as a result of increased property values.

The Revenue Commissioners publish comprehensive LPT statistics on a quarterly and annual basis, which include information in relation to collection and compliance, exemptions and deferrals, and payment types. Some of this is broken down by local authority. The compliance rate for 2017 is currently 97%, which is line with rates in previous years.

Given its importance and conscious of the concerns of homeowners over increasing property prices and potential effects on their LPT liabilities, particularly in urban areas, the previous Minister for Finance engaged Dr. Don Thornhill in 2015 to conduct a review of the operation of the LPT. The review focussed in particular on any impacts on LPT liabilities due to property price developments. The terms of reference for the 2015 review required that it also have regard to the overall yield from LPT and its contribution to total tax revenue on an ongoing basis and the desirability of achieving relative stability, both over the short and longer terms, in LPT payments of liable persons.

The central recommendation of Dr. Thornhill’s 2015 review was for a revised system whereby a minimum level of LPT revenues in each local authority area would be determined by Government, ideally having regard to the apportionment between local authority areas of the historic yield. This, in turn, would allow for the estimation of LPT rates for each local authority area and the application of these by taxpayers and Revenue. Local authorities could adjust this rate upwards by a factor of up to 15%. This new system was recommended by Dr. Thornhill with a possible interim deferral of the next valuation date until November 2018 or November 2019.

The Department of Finance is now advancing consideration of issues relating to the implementation of the remaining recommendations in the 2015 Thornhill LPT review report in line with the 2019 revaluation timeline. We welcome the opportunity to hear the views of committee members in relation to LPT and we look forward to the report of the committee’s deliberations which will inform our own work. Following the completion of the Department’s work, recommendations will be put to the Minister for Finance who intends to make the future position on LPT clear so that households will know well advance of November 2019 what the Government’s plans are for the LPT. It is important to note that the Minister for Finance has reiterated the importance of the principle that formed a central part of the terms of reference for the 2015 review of LPT, that is, achieving relative stability in LPT payments of liable persons both over the short and longer term. This principle will inform our current consideration of this matter.

Budget 2018 included a change to the rate of stamp duty on non-residential property from 2% to 6%, which was projected to raise €376 million in 2018.

Budget 2018 included a change to the rate of stamp duty on non-residential property from 2% to 6%, which was projected to raise €376 million in 2018. This was based on estimates in Revenue’s pre-budget ready reckoner, which showed the effect of a 0.5% increase in the rate on non-residential property to be a €47 million increase in yield – this is multiplied up to €94 million for a 1% increase or €376 million for a 4% increase.

We understand from Revenue that the yield projection for 2018 was based on receipts for previous years, combined with an ongoing assessment of expected receipts by the end of 2017 and for 2018, as well as impacts of earlier policy changes. This process includes assessment of significant once-off transactions that positively increased 2016 receipts but which were not expected to recur on a regular basis. Failure to account for these one-off transactions would have led to a higher estimate for 2018. The estimate is therefore considered to be conservative and prudent.

Following budget 2018, Revenue updated the ready reckoner to a post-budget basis, taking account of budgetary changes and revised growth forecasts from the Department for 2018. The post-budget ready reckoner indicates that each 0.5% increase in the stamp duty rate applying to non-residential property would result in a €49 million increase in the overall yield. This would indicate that the estimated additional yield from the increase in stamp duty rate on non-residential property could be in the region of €392 million rather than €376 million. In the absence of precise and accurate forecasts for transaction volumes in 2018, basing receipts on 2016-17 levels and trends is the most reasonable option. The estimate also assumes current exemptions and other reliefs remain unchanged.

We are advised by Revenue that, adjusting for possible one-off transactions in 2016, receipts in the three-year period from 2014 to 2016 were quite stable and Revenue's assessment is that it seems reasonable to expect this level of activity is sustainable and for it to continue.

Tax receipts under all heads are monitored closely and reported on in the monthly fiscal monitor, which incorporates the Exchequer statement.

As regards the economic rationale perspective, there were three primary reasons for the increase in the rate. Investment in non-housing building and construction has expanded rapidly over recent years and is approaching its pre-crisis share of GNI. The Department’s forecasts suggest that this category of building investment will amount to some 8.1% of GNI in 2017, increasing to 10% by 2021. These forecasts are well in excess of the long-term average of 7.1%. The forecasts suggest that if left unchecked and combined with the need to significantly increase the level of residential construction there is a risk of overheating in the sector.

The need for increased housing supply is acute. To ensure that the building and construction sector is able to meet this demand while avoiding overheating in the sector as a whole, policy measures that would incentivise a re-balancing of activity away from non-residential commercial construction activity in favour of residential activity are needed. I would like to note that our position on this matter has been supported by a number of economic commentators.

The flat rate of 2% was introduced at a time when activity levels were exceptionally low. It was intended to incentivise activity and was justified by the exceptionally difficult market situation and lack of commercial output that applied at the time of its introduction. Activity in the sector has now fully recovered, negating the need for the continuation of such a measure.

I hope the foregoing will be of assistance to the committee. My colleagues and I are happy to take any questions.