While the last six years has seen a shift towards a more equitable taxation system in the Republic, there remains a lone Victorian outpost of taxation policy that has been totally ignored - commercial rates.
Rates, in that they are levied solely on commercial and industrial property, are a tax on production. Because rates are payable irrespective of profits, they are an input cost of production. The imposition of such an input cost of production on assets that generate economic wealth is by definition regressive taxation.
There are 88 local authorities in the Republic who can levy rates. A Constitutional amendment was passed in June 1999 that recognises the role of local government and provides a better de jure basis for the powers and functions of the local authorities.
The Irish valuation system on the basis of which rates are levied dates from the Valuation (Ireland) Act 1852, and the primary rules for the calculation of the rateable valuation of property have not fundamentally changed since then. The new Valuation Bill may well compound rather than remedy the problems associated with the current rating system. The Irish rating system, which is acknowledged by the authorities to be based on a number of Victorian statutes, was set up at a time when the taxation system was very different from the present system and when the distribution of property and of income was also very different. Income and ownership of property are now more evenly distributed and the Republic has the highest proportion of home ownership among all OECD countries. With our broader spectrum of income distribution and home ownership, the case for a narrow base of property taxation is significantly reduced. The argument for more broadly based funding of all essential public services becomes unanswerable.
Against the background of the deficiencies in the current system it is understandable that there is a widespread perception in the business community that rates constitute an unjust tax. Rates are, and always have been, a source of local taxation and represent a source of funding for the local authorities. In terms of equity, rates have for many years been levied solely on industrial and commercial premises. Rates on agricultural land were abolished in the early 1980s after a Supreme Court ruling that the basis of calculation was unconstitutional. Rates on domestic dwellings were removed in 1977 and replaced by a grant in lieu of rates paid by the Exchequer. The industrial and commercial community were left in effect, to underwrite the entire difference between projected expenditure of a local authority and projected receipts from all sources other than rates. The business community is not simply being asked to provide a "bottomless pit" to fund the balance of local authority current expenditure over projected receipts from all other sources through commercial rates, but it has also been levied with service charges. The introduction by local authorities of separate charges for general services that had previously been included within the rates raises a fundamental question as to the nature of local authority services and who should pay for those services. Local authorities provide goods and services of a public utility nature no different generically from the provision of electricity, gas, telecommunications or transport, where the user pays by reference to usage. This is the approach in the case of water - an essential input to commercial processes - which is metered and charged accordingly by the local authority. To protect consumer interests in these commercial services, the commercial operations of local authorities should be subject to independent adjudication as to price, with a regime similar to that which now applies to other commercial public utility areas.
Official recognition of the deficiencies in the system of calculating rates on industrial and commercial property is of long standing. The Interdepartmental Committee on Local Finance and Taxation, which reported in the late 1960s, recommended that a complete general revaluation might be the ideal solution to what was then seen as the unsatisfactory calculation of rateable valuations. These problems in respect of complexity still remain, the only difference being that those problems now apply only to industrial and commercial premises.
Rates, as currently levied, amount to a disincentive to enterprise and as such should be replaced by alternative funding mechanisms. The proposed new Valuation Bill, according to the June 1999 statement of the Valuation Office, will retain all of the basic principles of the existing unjust system and will further consolidate the discrimination against commercial and industrial properties by finally and formally removing all other properties from the Valuation Rolls.
Pat Delaney is director of the Small Firms Association.
