Council tax reform- an impossible challenge?
1st March 2009
Is Council Tax reformable? There is an immediate conundrum: it is generally regarded as political suicide to suggest revaluing the Council Tax base: the enduring howls of the ‘losers’ would easily drown out the quiet acquiescence of the ‘winners’. Yet if nothing is done, Council Tax becomes an almost meaningless tax, no longer related to property values and levied on an almost entirely fictitious basis. It is supposed to be a tax that enables Local Authorities to exert local discretion about what to levy, and to embody an important principle of local taxation. But once the tax escapes from any base, it then becomes held in place only by capping – an acknowledged national ‘norm’ around which tax decisions revolve. The erstwhile attractive alternative, Local Income Tax , it is now recognised, shares this problem as well as an even larger swerve between ‘winners’ and ‘losers’ than revaluation of council Tax ever would : it can only realistically be introduced as a national uniform tax addition (and hence not at all a ‘local’ tax), as we are now seeing in Scotland.
Elegant but unimplementable plans are out, therefore, and so is the notion of throwing money at reform, as the Conservative Government did in 1993 in introducing the Council Tax plus a 2 % hike in VAT. What makes up the revenue ‘pie’ for local government: Business Rate, Council Tax ,grant and the element of it that is contributed in lieu of the ‘take’ foregone by Council Tax Benefit, has to emerge from any reform looking in size, at least from the point of view of Treasury, something like it does now.
So how might a property tax that overcomes the limitations of the Council Tax and remains as a genuinely local tax raising device be established? Most of the ailments of Council Tax relate to its specific design rather than to the idea that a tax on property is a bad way levy a local tax. It is not: it relates to local conditions, it is easy to collect, difficult to evade, and (as the Lyons report records) generally a reasonable proxy for ability to pay a local tax. But we would need to start afresh on what a property tax can do, and how it is levied.
A revaluation must not be followed by banding, even if new bands are added to the existing range. Bands are part of the problem: the framers of Council Tax quite erroneously believed bands would absorb the range of property values for many years: a banding system for a revised property tax would only replicate this fault. Instead, revaluation could easily be followed by the introduction of a capital value ‘points’ system’ which would enable local authorities to assess tax liability per point by assessing the total ‘points’ in their area. Adjustments for regional variation in aggregate capital value could be introduced by varying the point-value at which property tax is levied. Periodic revaluations would then simply add points as values changed.
We would need to consider whether a successor tax really should carry the entire requirement for local fundraising on its shoulders. Council Tax raised £9 billion when introduced, and now yields over £25 billion as the sole Local Government Tax. If it did not, then the process of revaluation could be much more equitably undertaken; a 10% reduction in the overall ‘take’ from a new property tax would mean that, post-revaluation, most households would gain or be no worse off than under council Tax.
A revaluation process would also be much more sustainable in the long term if it reflected the real scope of the property tax system, which is in reality, Council Tax, Business Rate plus income from Council tax foregone through Council Tax Benefit and restored by the grant system. The scope for reform of the Business Rate is probably limited to the sort of measure presently embodied by the Supplementary Business Rate proposals presently going through Parliament. Council Tax Benefit is another matter. It presently occupies a curious position as an income-determined rebate which neither aligns with the general tax credit system, nor bestows a benefit on anyone in the accepted sense. What it does is declare the point at which someone occupying a property becomes liable for Council Tax because of their income. But it doesn’t do it very well; only a small majority of those eligible to claim actually do so. Any reform of Council Tax would be greatly strengthened by arrangements simply to exempt those who fell below eligibility. To do this it would be necessary to align CTB trigger points with other tax payments, and to make exemption ‘automatic’ rather than claimable. It would probably still be necessary to operate a claim regime for partial benefit: but to exempt perhaps half of all pensioners, for example, from any payment at all would give great weight to other subsequent reform.
This would, of course, cost money, but a side effect of CTB is that it rises automatically with Council Tax increases. A change in the effect of tax at different property values, or an overall decrease in the total Council Tax ‘take’ has an deflating effect on CTB, and can substantially balance off additional costs to Treasury .
Another largely unreported side effect of the Council Tax system is the timing of the sequence of events that leads from the award of grant, through the budgetary process and to the setting of a council tax. Since a Council budget is the last event in the sequence it inevitably leads to the problem of ‘gearing’ (whereby councils may need to raise Council Tax by perhaps 4% for a 1% increase in actual expenditure). If there were a provisional grant settlement, with an element withheld until after the setting of a property tax demand, then gearing would be neutralised. The process of awarding the rest of the grant would be a relatively sensitive mechanism for Government to decide whether to ‘cap’ excessive increases or not, rather than the frankly crude measures that have governed ‘capping’ in the Council Tax era.
The overall effect of these measures – a property tax based on a points system, the integration of Council Tax benefit into an overall property tax system and the introduction of a provisional grants system, - would, broadly speaking, be cost-neutral from a Treasury point of view. But of course, a 10% reduction in scope of a new property tax compared to Council Tax would leave an income ‘gap’ for local government as a whole. There is a strong case for broadening the palette of local taxes available to local government, provided they are related in proportion to other forms of local taxation, and that they do no more than replace reductions in the cost to the taxpayer of any new form of council tax. Most proposals in this area either simply transfer a tax responsibility from central to local government, or are ‘lumpy’ in that they apply in some parts of the country and not in others. Even ‘non-lumpy’ candidates such as sales taxes could, if applied variably, conceivably lead to ‘cross border’ shopping trips where the weekly shopping has a lower local sales tax applied to it.
The best additional replacement tax would probably be some form of local environmental levy, which reflected the increasing role that local authorities take in maintaining and managing the local environment. Perhaps a modest local levy on take away packaging would be an effective replacement overall for a reduction in overall property tax demand. Even that, though, might produce similar howls of outrage that greet attempts to reform Council Tax. Perhaps throwing an ‘invisible’ VAT rise at a problem was not such bad politics after all: but then in retrospect, meddling in the first place with the Rates system that had survived in some form or other since the 16th Century most certainly was.
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- Originally published in Public Finance Magazine