Council Tax reform is the talk of the town. Local and central governments in many towns and cities, in fact, are currently debating reforming the decades-old system that political consensus has now deemed unsustainable. Last week, MainStreet attended one of these debates: ‘Property and council tax’ hosted by the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) with guest speaker Mark Stephens, Professor of Public Policy at Heriot-Watt University. The provocation was to debate the alleged need to replace the Council Tax with an alternative rooted on property values and income tax.
The Council Tax freeze is expensive. Keeping the freeze requires the Scottish government to put aside £560m per annum to maintain public services; while an additional £70m is added on for each year of the freeze – the cumulative cost of the freeze is now £2.5bn. The Council Tax system has borne too much of the increase in cost of local spending for too long, and, in the opinion of Professor Stephens, taking no action is no longer an option as local and central government struggles to reduce the impacts of austerity cuts in the block grant from Westminster. This view is supported by our colleague, Professor Richard Kerley: “I don’t think anyone believed that the ‘freeze’ would last as long as it has done […] We were promised that it would last until a new form of local income tax could be introduced; and when this did not happen, the government seemed to run out of any other idea for tackling local domestic taxes”. Read Professor Kerley’s recent LGiU article ‘Council Tax: there’s safety in numbers’ in full.
The Scottish Government is still treading lightly on the idea of increasing Council Tax possibly because it is inherently unfair: Professor Stephens believes that the current bands system is designed to tax higher valued properties less than cheaper ones. This creates an unfairness where those who live in more expensive and higher banded houses, who also enjoy higher incomes, are taxed less heavily than people on low incomes. This discord can be mitigated by introducing additional bands but it cannot be eliminated.
So we need to find a new tax for local government which is fair.
Local taxation and property tax
Local taxation sounds like a fair option, but it must be just that – local. “This is why we need a reformed property tax” argues Professor Stephens – because taxes on real property (i.e. land and buildings) are the main, if not the only, basis of local taxation. This option ensures that the tax base doesn’t shift with tax rate changes. Unlike income tax, for instance, the property remains even if people move to avoid higher income tax in one council area compared to another.
Professor Stephens was clear that a fair system of property taxation is essential to replace the unfair Council Tax and suggested that a successfully reformed property tax must consider:
- A likely knock-on effect on the housing market with the potential for house price inflation affecting first time buyers and private renters disproportionately and exacerbating the housing crisis.
- The mismatch between current income and property value – the ‘asset rich, income poor’ issue meaning it isn’t capital value that should be taxed, but renting value. This would afford some protection to those with low incomes who live in more expensive properties.
More detailed information on potential bases for reform can be found in the cross-party Commission on Local Tax Reform’s report ‘Just Change: A New Approach to Local Taxation’. The Commission, established jointly by the Scottish Government and Convention of Scottish Local Authorities, set out three possible bases for reform. These are: a replacement property tax, which would be based on the value of land and buildings; a tax based only on the value of land; and a local income tax raising revenue based on an individual’s taxable income.
All choices are politically difficult to make, but we need a ‘fair’ form of taxation that commands public consent and meets modern circumstance. What is certain is that any form of local taxation should be local and we have to encourage devolution of responsibility to local government to decide on how their money is raised and distributed. Surely this is a key part of local democracy?