Lowering the ceiling for tax deduction on home repair services is cost effective

The tax deduction on home repair services was introduced in 2009 as a permanent and long-term measure. The Swedish National Audit Office’s audit shows that the tax deduction on home repair services has had a relatively large impact on reducing household demand for undeclared skilled services, but a limited effect when it comes to increasing labour supply and income.

The reduced demand for undeclared skilled services has led to an increase in tax revenues of just over SEK 1 billion per year. The increase in labour supply has led to an increase in tax revenues of just over SEK 0.3 billion per year.

At the same time, central government costs for the tax deduction amount to about SEK 10 billion in a single year. A public finance net cost of just over SEK 8 billion means that the self-financing rate of the tax deduction amounts to 14 per cent, which is a modest figure.

“The tax deduction on home repair services is not effectively designed in its current construction. Reducing undeclared labour and increased labour supply does not create sufficiently large tax revenues to justify the central government costs,” says Auditor General Helena Lindberg.

Despite the drive toward fewer undeclared skilled services, the existence of undeclared wages and other working life crime has also increased recently, above all among small companies in the construction sector.

This means that many skilled services covered by tax deduction that have been perceived as declared services at the consumer level were in fact paid with undeclared wages, beyond buyers’ insight and control.

It is the assessment of the Swedish NAO that initiatives other than this tax deduction are required to tackle undeclared labour, and that is it appropriate to proceed with the measures that have previously been discussed in government inquiries. It is a matter of increasing agencies’ possibilities to cooperate and implement controls.

There are several reasons why this tax deduction has not had the desired impact on buyers’ labour supply. Primarily, it is because one-third of those using this tax deduction are pensioners, persons who are not gainfully employed and persons with very high incomes and who, for this reason, are not expected to increase their labour supply.

It is also often difficult for the buyers to carry out the work themselves, since it often requires a relatively high degree of specialist knowledge, for example electrical installations or plumbing work. A large part of the services would therefore have been purchased even if this tax deduction did not exist.

“Since the tax deduction does not have any significant impact on buyers’ labour supply, it should be adjusted according to possible effects on the existence of undeclared labour,” says Krister Jensevik, project leader for the audit.

Recommendation

The Swedish NAO recommends that the Government reduce the tax deduction by designing it so that its cost effectiveness increases in relation to the target for combating undeclared labour. This can be done, for example, by lowering the maximum tax deduction on home repair services per person and year.