The French government intends to abolish the taxe d’habitation, but just how such a profound change is to be funded remains unclear.

One of the key manifesto promises of Emmanuel Macron was the abolition of the taxe d’habitation for 80% of households, a tax he argued during the campaign was ‘unjust’.

This tax is one of the two local property rates levied on households in France, the other being the taxe foncière.

The proceeds of the tax amount to around €20 billion a year to the local authorities.

The process of abolition will begin this year, there will be a reduction of 30% in the tax bill for households with an income below a maximum threshold

• Single persons whose net taxable income does not exceed €27K;
• Couples whose taxable income is no higher than €43K;
• Increased by €6K for each additional dependant in the household.

Since coming to power the government has become more ambitious with the plan, announcing that they propose to abolish the tax completely for all households by 2022, a position taken to avoid the measure otherwise being declared unconstitutional by the French Constitutional Court.

There has been some doubt as to whether second homes would also be exempt, and the indications are that they will remain liable, or that they will face a higher level of imposition through the taxe foncière or other tax.

Not surprisingly, the local councils are outraged by the plan, which they consider an assault on their autonomy. The tax is the main source of revenue for the municipal councils, the communes/communautés des communes.

Despite the gaping hole in public finances that will arise from this measure, the government has persisted in its claim that there will be no new tax to replace it.

Olivier Dussopt, who is the secretary of state in charge of local finances has stated that: "Je le répète: il n’y aura pas de nouvel impôt, ni de hausse de la fiscalité, au contraire. Cet effort sera surtout financé par des économies."

Similarly, his boss Gérald Darmanin, the Minister of Public Action and Accounts has stated that it will be a "cadeau fiscal" for taxpayers, as financing of the change would be by resign and simplification of local taxation.

President Macron has also confirmed that it will be funded by economies that would be made in government spending, stating: "Il n’y aura pas de création d’un nouvel impôt local, ni d’un nouvel impôt national et il n’y aura pas d’augmentation de la pression de cet impôt. Ce qui veut dire que nous compensons à l’euro près par les économies qui seront faites par l’État."

However, although there may be no new taxes it does seem an impossible equation, and that other taxes will have to rise to pay for it.

France may well have recently escaped the clutches of budget oversight by the EU, having been in breach of debt rules since 2007, but the deficit continues to flirt near the limits.

Earlier this year the French national auditor, the Cour de Comptes, was scathing of the way in which the government had presented the accounts for 2017, stating that the budgetary balance had only been achieved by methodological bias.

More recently, they have stated that although the government have ambitious objectives for the control of public expenditure, they have yet to define just how it is to be achieved. They consider the government forecasts of economic growth to be optimistic, and for there to be 'important risks' for the future of public expenditure.

The respected think-tank 'Fondation pour la recherche sur les administrations et les politiques publiques (FRAP)' has also cast doubt on the outlook for public finances, stating that expenditure has continued to rise, and that the budget had only been saved by economic growth yielding a higher level of revenues than anticipated.

In order to come up with a solution and placate the anger of the local councils, last year the government established a working party to look at the issue.

In March the ‘Richard-Bur’ committee published their recommendations, which amount broadly to the transfer of the proceeds of the taxe foncière from the departments to the municipalities, with the departments in turn being compensated by a transfer of VAT receipts.

The government appears to have decided to accept this principle recommendation, with second and vacant homes still subject to a tax 'equivalent' to the taxe d'habitation.

Although the municipal councils have reacted with some relief that they would be able to keep a local tax, it sent the departments into a state of apoplexy, with their association stating their "opposition ferme et définitive" to the idea.

Moreover, the report failed to deal with just how the State would itself manage with fewer VAT receipts.

The cat may have been let out the bag last month when Bruno Le Maire the economy minister stated to the French parliament that he was reviewing whether the reduced rate of VAT on various business activities such as restaurant meals and building work was still appropriate. The reduced rate costs tens of billions a year to the State.

An increase in stamp duty for the departments was also one of the other ideas floated by the Prime Minister Edouard Phillipe in May, only for the proposal to be withdrawn a month later, when the departments indicated that they were unwilling to cooperate in a reduction in spending.

The idea was also one that was not supported by Bruno Le Maire, and the hasty retreat by the Prime Minister may well have been due to the widespread opposition it drew.

Without a compensatory tax increase then it seems inevitable that abolition of the tax will result in an increase in the level of the public deficit, which will once again put France under threat of sanctions by the EU.

In a statement earlier this month the government appears to have accepted that part of the funding will indeed be through an increase in the deficit.