20 February 2009
Everyone agrees that the council tax is unfair, but is there an alternative property tax? Alan Whitehead says a points-based system would work
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 give local authorities discretion about how much to levy – an important principle of local taxation. But, once the tax escapes from its base, it then becomes held in place only by capping – an acknowledged national ‘norm’.
Local income tax, the erstwhile attractive alternative, is now recognised to share this problem. It would bring about an even larger swerve between ‘winners’ and ‘losers’ than revaluation of council tax would and it could realistically be introduced only as a national uniform tax addition. Hence it would not really be a ‘local’ tax at all – as we saw in Scotland before the retreat from LIT.
Elegant but unviable plans are out, therefore, as 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.
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 to 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, is generally a reasonable proxy for ability to pay a local tax. But we do need to start afresh in thinking about what a property tax can do, and how it is levied.
So how might a property tax be established that both overcomes the limitations of the council tax and remains a genuinely local tax-raising device?
First, banding must be abolished. Adding new bands to the existing range will not resolve the problems. The developers of council tax mistakenly believed that 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 of properties could easily be combined with the introduction of a capital value ‘points’ system, which would enable local authorities to assess tax liability by assessing the total ‘points’ in their area. In this system, points would be allocated according to value and would take into account regional variations in aggregate capital. Periodic revaluations would then simply add points as values changed.
We would also need to consider whether a successor tax really should carry the entire requirement for local fundraising on its shoulders. The revenue ‘pie’ for local government is, in reality, made up of business rates, council tax, government grants and the element of it that is contributed in lieu of the ‘take’ forgone by council tax benefit.
The size of this pie must, at least from the point of view of the Treasury, be kept something like it is now. But council tax raised £9bn when introduced, and now yields more than £25bn as the sole local government tax, about 16% of the total. If it did not make up such a large part of the revenue, 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.
Of course, this reduction 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 a form of local environmental levy, to reflect local authorities’ growing role in maintaining and managing the environment. A modest local levy on takeaway packaging could be an effective replacement for a reduction in property tax demand.
Without this extra burden, we can formulate a more sensible revaluation process, which would encompass business rates plus income from council tax forgone through council tax benefit and restored by the grant system, as well as the council tax itself.
Although the scope for reform of the business rate is probably limited to the sort of measure embodied by the business rate supplement proposals presently going through Parliament, council tax benefit is another matter.
It presently occupies a curious position as an income-determined rebate that neither aligns with the general tax credit system nor bestows a benefit on anyone in the accepted sense. What it does is use income to declare the point at which someone occupying a property becomes liable for council tax. 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 fall 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 reforms.
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 a deflating effect on CTB and can substantially balance off additional costs to the 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 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 might 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.
Even so, they might produce the familiar 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 meddling in the first place with the rates system, which had survived in some form or other since the sixteenth century, most certainly was.
