What would council tax reform mean for people and places?
The wariness of British politicians to residential property taxes dates back at least as far as British peoples’ infatuation with house prices and house price growth (see my blog entry last year on this very subject).
This fact was firmly in my mind as I launched the publication of a new research report by the Joseph Rowntree Foundation at the House of Parliament this week. The report, entitled: ‘After the council tax: Impacts of property tax reform on people, places and house prices’ was commissioned at a curious crossroads of events and economic circumstances. Although the UK coalition government has reaffirmed its desire to effect a freeze on council tax rates, in fact something of a patchwork of local authority decisions has emerged. This is in the context of quite significant recent cuts to local government grant, the coalition government’s promotion of the localism agenda, and what appears to be the beginning of a long-awaited recovery of the housing market.
So, while academics, policy advisors and politicians have long known that the council tax may only have had a limited shelf life, it is only quite recently that the scene has become set for the return of debate about how to properly plan the replacement of this decaying, and increasingly dysfunctional, method of raising an element of local government revenue.
The study, launched yesterday at the House of Lords, explored three scenarios of possible reform to the current council tax system in England (Wales has already had a revaluation to 2003 values while Scotland is being examined separately by the research team). To allow us to properly and fairly examine the scenarios of central interest, the first thing we did in this study was to assume a revaluation of the council tax base with new council tax band limits designed to put the same proportion of properties in each band, nationally, as under the present arrangements. Our study then picks up on a recommendation of the Joseph Rowntree Foundation’s housing market taskforce by exploring the possible impacts of a national property tax. Two versions of this are examined: a flat rate tax and, second, a more progressive tax structure.
It is worth remembering that the council tax was designed and introduced relatively hastily – literally following scenes of civil unrest – as a replacement for the deeply unpopular community charge, dubbed the ‘poll tax’. It was designed to be regressive, but with safeguards to protect students, the elderly, single adults and those on low incomes. For more than 20 years it has been broadly accepted by the majority as a fair way of raising a significant minority of local government revenue.
Peoples’ council tax liabilities are largely determined by the hypothetical value of the property they occupy in 1991. With no revaluation of the council tax base since its introduction, more than two decades of differential rates of price change remain unreflected in the local tax base. This effectively creates a subsidy flowing from areas in which prices have grown relatively slowly to those in which price growth has been more pronounced. This, of course, is an absurd situation! It is also the case that the distribution of house prices has widened over the past 20 or so years. The result of these two facts is that the council tax has become far more regressive than it was ever designed to be. It was not designed to run for as long as it has without revaluation and re-assessment of the band limits.
The most striking finding of this new report is also, perhaps, unsurprising. The ‘London effect’ is so pronounced that our recommendations included that London would need to be treated separately if the council tax were to be replaced by a national property tax. Although such a reform would remove the apparent under taxation of domestic property in London (currently 1.5% of GVA as compared with around 2.5 – 3% in the rest of the country), the impact on peoples’ bills would be significant. Across England overall, two thirds of households would see bills fall while one third would see them rise. Around 20% would see bills rise by more than £100 per year and around 10% would have bills higher by over £700 per year. Bills would be lower for those on low incomes and for elderly people – singles and couples. However, the results are also somewhat anomalous as the result of a ‘London effect’. Residential property values in London are now so high compared with the rest of the country that even people on very low incomes would see higher bills if council tax were replaced by a national property tax. Meanwhile, people on much higher incomes but living in the north of the country could see their bills fall.
Where do we hope this will go next? It is clear that no major political party has an appetite to properly address the problems now being caused by the decaying system of council tax. Ironically, these problems are the result of 20 years of drift and neglect of a system not designed to last indefinitely. The authors of this new report at least hope that it will help promote the need for a long overdue debate.
The two tax bases for local government in England – the council tax and the business rate – are incredibly concentrated in London and the south east – hence the London problem to which the report refers. Unfortunately, any conceivable alternative tax base – a local income tax, a sales tax, a tourist tax, and of course a property tax – would also be concentrated in the same area, because economic activity and wealth are increasingly concentrated there. This leads me to the conclusion that it will be increasingly difficult to fund local services the demand for which depends on the relative poverty of an area – such as, above all, adult social care – from local taxation. We need a new consensus on what local government is for. And for that we need a constitutional convention, of the type that preceded devolution in Scotland – change of this nature is unlikely to come from the mainstream political system.
This would completely destroy any vestigal independence in local government. And I completely fail to see how the council tax system is ‘decaying’. Daft idea.
The highest rates of under-occupation (see English housing survey for data) between the owner occupied sector, the private rented sector and the social housing sector are in the OOS. Government has already shown through the ‘bedroom tax’ a desire to charge people for under-occupation. So any reform of council tax could include an element of under occupation in the tax calculation. The additional under occupation local tax raised could then be used to support the development of new affordable housing or it would encourage the owner occupier to better utilise their home. Who knows, this might actually reduce the pressure to build new homes. And before anyone says this would be unfair as owner occupiers have not been subsidised like social housing tenants consider the fact that for decades owner occupiers have been exempt from capital gains tax on the unearned gains on their successive housing sales – a huge tax subsidy – which maybe cannot be afforded in current times.