News analysis McConnell says no way to Burts new property tax

17 November 2006

Launching the report of his inquiry into local government finance in Scotland, Sir Peter Burt – the current chair of ITV – repeated several times what he saw as a main attraction of his proposed new local property tax: that 45% of householders would be better off and 20% no worse off.

He was wasting his breath.

Before Burt's long-awaited report, A fairer way, was published on November 9, the new plan had already been effectively rejected by First Minister Jack McConnell. 'Sources close to the first minister' – reacting to a leaked version of the main recommendation – said there was 'no way' that Labour ministers would support a tax that required householders to pay about 1% of the value of their house each year.

For McConnell, the doubling or tripling of affluent 'Middle Scotland's' council tax liability was the last thing he needed within six months of a potentially close-run election. In retrospect, he might be wishing that – rather as has happened with the equivalent Lyons inquiry for England and Wales – he had kept closer supervision on the committee's activities to ensure a measure of political reality.

As Scottish National Party finance spokesman John Swinney gleefully pointed out: 'We have the farcical situation where the first minister has established a two-year commission that wasted taxpayers' money and reached a conclusion which the first minister has been forced to rubbish before it has even been published.'

Burt, after two years investigating the council tax and possible alternatives, was clearly unamused, though restrained in his reaction. 'It's a pity a number of people didn't wait to read the report before they commented on it,' he said. 'Council tax is an inherently unfair tax. The local property tax that we're recommending redresses that and it's a much fairer way.'

The main recommendation of the four-member committee, set up by the Scottish Executive, was unexpected. The proposed local property tax is a radical suggestion that conflicts with Labour's commitment to reform council tax and the Scottish National Party and Liberal Democrat plan for a local income tax, which the committee rejected.

Controversially, the LPT would be calculated on the market value of a property. There would be regular revaluations – initially every five years, although the committee suggested that the ideal would be annual revaluation (the last revaluation in Scotland was in 1991). Using current valuations, Scotland's 2.3 million householders would pay, on average, 0.9% of the market value of the house, raising the £2bn needed to pay for local government.

This would result in a bill of £900 a year for someone living in a house valued at £100,000. Further up the market, the bill for a house valued at £500,000 would be £4,500. As the present calculation of 0.9% is an average, the percentage of market value paid would vary across Scotland in accordance with the decisions of individual local authorities.

As Burt suggests that 65% of households would be either better off or no worse off under his plan, it follows that 35% – or around a third – would pay more. According to the committee, those paying more would be households in properties worth £250,000 and over – exactly the people most likely to mount a vocal and effective protest campaign.

The proposal to move to valuations based on market values is similar to the intensely controversial capital values scheme recently introduced in Northern Ireland, which has had its first property revaluation in 30 years. Following protests, the House of Lords last week approved an amendment to introduce a cap on rates bills and provide additional relief for pensioners and those on low incomes.

The Burt committee also proposed a novel deferment scheme for the 'asset rich and cash poor' – mainly pensioners who are on low incomes but live in expensive houses. The deferment would be funded through a new special purpose company that would advance the amount deferred to councils. The annual 'loan' paid to the household would be paid off when the house was sold or after the owner died.

Burt said that in view of the evidence supporting an LPT, it would be surprising if Sir Michael Lyons, whose report for England is due in December, did not favour the same solution.

Lyons, reacting to the Scottish report, was typically cautious. He said that although he did not agree with all its conclusions, it raised some challenging questions about how local government could be paid for as well as proposing a radical set of reforms: 'I am sure the arguments and the evidence the committee has brought to bear will contribute to debate in England as well as in Scotland.'

The Scottish Executive's official response was more emollient than the initial McConnell reaction, although its 'warm welcome' can be taken with a pinch of salt. Finance Minister Tom McCabe said: 'This is a substantive piece of work and will need careful consideration by the Executive, the Parliament, local authorities and the wider Scottish public.'

But the initial reaction from the body that represents councils in Scotland was scathing. 'A 1% home tax would be the worst of all possibilities,' said Pat Watters, president of the Convention of Scottish Local Authorities. 'Sir Peter would have been better not to have bothered.'

Don Peebles, policy and technical manager for CIPFA in Scotland, said it would be examining the LPT proposal to see exactly what it meant. 'A property tax as a means of taxation is consistent with what we would want to see,' he said. 'We're considering Burt's view that there is a proxy relationship between property and wealth and also carefully examining the potential impact upon the benefits system, given that the LPT does not include any form of discount. One of the regressive aspects of the council tax is that there is no direct link to the ability to pay.'

At Burt's press conference, he was asked whether his backing for a plan that would hit those living in the most expensive houses placed him to the Left of First Minister Jack McConnell and the Labour Party.

'I'll pass on that one,' he replied.

Enough said. The LPT proposal might be a logical, simple and easy-to-introduce alternative to the council tax, but it is already dead in the water.

Main findings of the Burt committee