06 October 2006
The Lyons Inquiry will have to find a way to make council tax fairer without the benefit of a revaluation of English homes. Peter Kenway and Ines Newman go back to basic principles and explain how the system needs to be reformed
Sir Michael Lyons has a difficult task. He wants to produce a paper that sets out a direction of reform to enable local authorities to have more financial freedom and to be more clearly accountable for the funds they raise. He does not want to issue a report with good policies that just sits on the shelf and is forgotten. Yet he faces a government that has cancelled revaluation in England and is unlikely to favour radical reform.
How does he address this dilemma? In part, by recognising that the scrapping of revaluation means that he will have to answer a more fundamental question than just how council tax should be brought up to date. Now he will have to answer the 'why' question first: that is, why council tax should be brought up to date at all, rather than being left to rely on the original 1991 valuations indefinitely. This is a question of principle.
The Centre for Council Tax Reform at the New Policy Institute has previously produced two pamphlets on council tax that have influenced the debate on local government finance and provided a backdrop to the Lyons Inquiry. In its new discussion paper, submitted to the inquiry, it has identified four areas where the principles need to be set out.
The first is revaluation. The basic case for revaluation is that, over time, the value of properties relative to one another changes, sometimes by a lot.
House price indexes suggest that this might be so. In Kent, for example, the average sale price of detached houses in spring 2006 was 204% higher than those sold there ten years earlier. By contrast, the average sale price of flats and maisonettes was 272% higher. The size of this difference is enough to suggest that the bands these types of property occupy relative to one another are no longer correct. Revaluation is needed to sort this out.
As well as differences between the types of properties, there are also differences between local areas. This is not just a question of one road 'going up' relative to another but of whole areas changing. What was an industrial wasteland 15 years ago can be a residential area now. The idea of a '1991 value' for the homes there is therefore pure guesswork.
Without a proper basis for comparisons, anomalies are bound to creep in. One council leader we spoke to said that, in his view, new properties tended to be put in higher bands than existing ones.
The basic case for revaluation is that, without it, the council tax becomes ever more an arbitrary tax. Principled, rather than arbitrary, taxation is the cause that we hope the final report of the Lyons Inquiry will champion. This means going further than in the interim report, which expressed the opinion that 'revaluation will be necessary if council tax is to remain credible as a property-based tax in the long term'.
The second area where a statement of principle is needed is over whether council tax is going to remain a truly national system. Again, this is an issue that has arisen only since the Lyons Inquiry was set up.
The cornerstone of the tax has always been that central government makes its decision about grant allocations in a way that requires all households in the same council tax band, wherever they are, to pay the same rate of council tax. The fact that we all actually pay different amounts reflects local decisions.
In the new grant system that started this year, the principle no longer holds automatically. In practice, it does still hold in 2006/07 but there is nothing to mean that it will inevitably continue into the future.
The question for the Lyons Inquiry is therefore whether the principle on which central government grant has long been distributed should continue. Specifically, should properties in the same council tax band, wherever they are in the country, be expected by central government to pay the same tax? We would argue that this principle should continue because without it the transparency on which local accountability rests is lost.
The third set of questions relate to council tax benefit and the principles on which working-age households pay council tax. We first raised this subject in a pamphlet last year, Making it fair: council tax benefit for working households.
One question is why people should start paying council tax when their income is too low to have to pay income tax. Another is why working-age households should start paying council tax on much lower incomes than pensioner households. One consequence of this treatment of working-age households is that some two-thirds of children in poverty in the UK live in households that pay either full or partial council tax.
The final matter in need of a statement of principle is the design of the bands. Council tax is basically a sound tax – the key principle is that the more your home is worth, the more you pay. Across most of the range, from bands B to F, the link between the two is quite stable.
However, the basic soundness of the system does not extend all the way up and all the way down the scale of property values. At the moment, the house worth £1.2m pays only one-fifth more council tax than the one worth £600,000 while the ones worth £2.4m, £4.8m and so on pay no more at all. Liability is not capped for either income tax or VAT so why is there a ceiling for council tax?
Likewise at the bottom, why should any property worth less than £100,000 pay the same council tax whether it is worth £25,000, £50,000 or £100,000? Why is there a floor on how little tax a household in a house of modest value should pay?
The question here does not relate to the rightness of banding, which is a rather good way of making the system more robust. It is why the relationship between house value and council tax, which applies fairly uniformly to most homes (from around £75,000 to £600,000), should not apply throughout the property ladder?
In place of an arbitrary council tax, we need one that is based on principle. Some of its arbitrariness is a result of the anomalies that grow in number as time passes. Some was built in from the beginning but can be easily reversed. And some comes about because council tax is not looked at properly as part of the wider tax system. In all cases, principles are needed to guide what happens in future. The final report of the Lyons Inquiry has the opportunity to set out what those principles should be.
Peter Kenway is the director of the New Policy Institute and Ines Newman is the head of policy at the Local Government Information Unit
PFoct2006
