The joint Scottish Government/COSLA Commission on Local Tax Reform published its report shortly before Christmas. Although the Scottish Government’s response to any recent questions about the council tax freeze has been to point to the existence of the Commission, it remains unclear how far the report has moved this difficult issue forward.
Reflecting views of all the Holyrood political parties (apart from the Scottish Conservatives who are conducting their own tax inquiry), local government and a number of other bodies, the report reached few firm conclusions beyond that the present Council tax system should end – a conclusion already implicit in the Commission’s remit “to identify and examine alternatives that would deliver a fairer system of local taxation.”
This is the latest in a long line of reports north and south of the border which have recommended council tax reform but have never been implemented because of spinelessness in government. The most recent example in Scotland was the 2006 report of the Local Government Finance Review Committee, chaired by Sir Peter Burt. After detailed study and wide consultation with experts and the public, this recommended that the council tax should be replaced by a property tax based on individual house values.
That report was dismissed by the then First Minister, Jack McConnell, before it was even published. Why Scottish Labour was not interested in even considering a much fairer alternative to the council tax has never been explained, but Mr McConnell’s action was certainly disrespectful to the members of the Committee who had spent over two years conducting the Review.
Failure to implement any of the reports recommending council tax reform has to be seen in the light of the history of local taxation. In well over 100 years, there have been only two changes to the local tax system, and both of those occurred within in a period of four years. The first – from Domestic Rates to the Poll Tax in 1989 – was ostensibly because of the crisis created by the 1985 Scottish revaluation, but I suspect was really because the then Prime Minister, Margaret Thatcher, did not like property taxes.
The second – from Poll Tax to council tax in 1993 – was to defuse one of the biggest political problems the Conservative Party has ever faced. In fact, each of those changes was attempting to deal with a serious political crisis. Will the next SNP Government (assuming current opinion polls for the May 2016 Election are correct) buck the historical trend and actually do something about the council tax beyond constantly freezing it? The Commission’s report concludes by saying that the opportunity for reform must not be missed, but will it?
Unfair tax is bad tax
There is no doubt that council tax is both a bad tax and an unfair tax. It is now difficult to believe that it was welcomed by the public and quickly defused the Poll Tax crisis. Its worst aspect is that it has the “slab” or “cliff edge” feature which became discredited in the old Stamp Duty system. This means that a variation of £1 in the value of a property can alter the band in which a property is placed and result in a difference of up to £380 in the amount of tax payable each and every year.
Council tax is unfair for a number of reasons. First, it is very regressive – it hits the poor proportionately much harder than the rich – and deliberately designed to be so, in order to minimise the change from the Poll Tax. The ratio of 3:1 between the highest (band H) and lowest (band A) payments bears no relationship to the spread of property values and even less to the spread of incomes. The council tax freeze – now applied for the ninth year in succession – has made it more regressive.
Secondly, the banding system – especially at the bottom and top of the bands – results in properties with a range of values (in the case of band H a wide range of values) being subject to the same level of tax.
Arguably the 25 per cent single person discount, a direct legacy of the Poll Tax, is another unfair aspect of the tax. The Commission did not reach firm conclusions on the many exemptions and discounts which apply to council tax, only suggesting that their applicability to any new system would need to be fully considered.
The unfairnesses built into the council tax have been greatly added to by the failure to revalue, and where necessary re-band, properties since the tax was introduced. A house built today has to be banded on the basis of what the property would have been worth in 1991 and, as the Commission’s report points out, some types of present day houses did not exist in 1991. Over the past 30 years for purely political reasons no Government has been prepared to contemplate a revaluation of domestic property. As an analysis carried out for the Commission by Heriot Watt University demonstrates all too clearly, the failure to revalue means that many properties are now subject to too little council tax, while many others are subject to too much.
No amount of tweaking the basic council tax model will ever overcome the fact that low value properties massively out-number high value ones.
Over the years it has been suggested that the simplest and quickest way to make the council tax less unfair would be to add more bands to the present eight bands or increase the ratio between bands or both. The Commission’s report illustrates a change in the ratio from the present 3:1 to 15:1 on the basis of an estimate that in 2013-14 a property in band H was worth, on average, 15 times the value of a property in band A.
More bands or a change in the ratio would make the council tax look less unfair, but it would increase the number of “cliff edges” and make each of those “edges” much steeper. And such changes would do little in practice to reduce the regressive nature of the tax. No amount of tweaking the basic council tax model will ever overcome the fact that low value properties massively out-number high value ones: nearly 50 per cent of all properties are in the two lowest current bands, while the two highest contain fewer than 4 per cent.
Widen the tax base
A strong theme of the Commission’s report is to widen local tax bases and to localise decisions on which taxes should be levied. This reflects Scottish local government’s long-held desire to change the balance of central government and local funding of council services (in 2013-14, the council tax accounted for only 12 per cent of total local government income). With this in mind, the report outlines the possibility of a combination of property and income taxes and suggests that local tax bases might be further widened with environmental, resource, sales or tourist taxes depending on local circumstances and decisions.
Against the background of the failure to implement any of the previous reports calling for reform of the council tax, the Commission’s report refers to the desirability of cross-party agreement on a new system of local taxation. But the report provides no clear basis for building that consensus.
Reflecting the different views of the political parties represented on it and Scottish local government itself, the report outlines three main candidates to replace the present council tax.
- a tax on property (land and buildings) based on banded or individual valuations:
- a land value tax: and
- a tax on income.
A land value tax, long favoured by the Scottish Green Party, is seen by the Commission as a “promising” option but one requiring more work before it could be implemented. The Commission has sought to address in more detail previous criticisms of the other two main options.
The main criticism of a property tax has always been that there is only a broad correlation between house values and income and no direct link with ability to pay such a tax. The Commission believes that, in this respect, the existing Council Tax Reduction Scheme is inadequate and that a more generous and targeted scheme is required.
However, the Commission also concludes that “as far as possible, any new (local taxation) system should be designed to minimise the need for complex relief schemes for individuals or households.” It is difficult to see how any replacement of the Council Tax Reduction Scheme which better assessed ability to pay would not be more complex than the present scheme.
The revaluation challenge looms
But the biggest obstacle to the introduction of a new property tax on either a banded or individual valuation basis remains revaluation to reflect up-to-date house values. Even the addition of more bands to the existing council tax would require the revaluation of at least two or three of the upper bands. The Commission refers to the need for a revaluation as a “substantial political challenge,” which on past form is something of an understatement. But if there is ever to be a fairer local property tax the challenge of a revaluation will have to be faced.
The Commission notes that “there is a strong case for distancing any revaluation process from short-term political pressures” and suggests that this could be achieved by making regular revaluations a statutory requirement. This is an admirable sentiment, but, in the past, it has not guaranteed revaluations.
Discussing the alternative of an income tax to fund local services, the Commission recognises past criticisms of this model. First, it has suggested that efforts should be made to bring income from savings and dividends within the scope of a local income tax. Second, instead of piggy-backing on the HMRC collection arrangements, perhaps requiring the agreement of the UK Government and legislation at Westminster, the report outlines other possible options for collecting the tax.
How local is local?
To make it a truly local income tax it raises the possibility of it being set and collected by each of the 32 local authorities. To facilitate this, the report raises the possibility of each resident submitting a tax return to his or her local authority.
Both these are radical options which would require a great deal of further work before they could be implemented. There is a hint in the report that, because of the time this would take, a short-term fix would be to assign to local authorities a share of an increased Scottish Rate of Income Tax (SRIT). However, this would undermine completely the localisation agenda outlined in the report, would not deal with the unfairness of taxing only earned income, and it is not clear that part of the total SRIT yield could be allocated accurately to each of the 32 local authority areas.
In order to change the balance of funding in favour of local government, more than the £2bn presently raised from the council tax would need to be raised from any new local taxation system. But even if the objective of a new system was to raise the same £2bn, the Commission recognises that there would be winners and losers both at a household level and amongst local authorities. It is proposed that transitional relief arrangements should be introduced to help households to adjust to the new system and that the resource equalisation arrangements should be adjusted to ensure that local authorities with reduced tax bases do not lose out.
The next step will be to see how much of the Commission’s report feeds through into the May Election manifestos. It would be a major practical task to implement a new local taxation system during the course of the next Parliament, even if the political barriers could be lowered. It is not at all obvious yet how much the work of the latest commission will help achieve that first step.
Featured image: Leith rooftops by Alan Stockdale