Time up for the unfair tax?

2 Apr 14

Now is the moment to start thinking about a long-term replacement for the council tax. Reform is not easy, but it is not impossible either

We hear a lot about the cost of living these days. So much so it’s become part of the mantra for freezing council tax. Put that together with the fact that nobody likes taxes (never mind the spectre of the poll tax riots) and you see why council tax is such an easy political football to kick around.

No one wants to stand for re-election based on a mandate of increased council tax bills, with expected reductions in London for 2014/15 seemingly linked to May’s local elections. The sympathy card is often played for a quick political win – note the council tax relief offered for flood victims, without any attempt to address underlying unfairness.

This all makes it harder to address the fundamental problems with council tax that have become progressively worse since the system was hastily introduced in 1993 to replace the hated poll tax.

With valuations standing since 1991 (outside a Welsh revaluation in 2005), house prices are now completely out of kilter with council tax. That may well have contributed to house price inflation in the boom years.

The inherent ambiguity of whether council tax is a charge for local services or an imperfect property tax also blocks reform. In reality, authorities have little flexibility on council tax and it is not their main funding source. It’s also unclear why paying council tax offers any greater accountability than voting in local elections.

Most important, though, council tax is unfair. If you live in a lower-value property, you end up paying a higher proportion of its value in tax. So a property valued at £320,001 is worth nearly five times a £68,001 home but pays only twice the amount of tax. While that makes it easy to sympathise with the now regular-as-clockwork calls for a mansion tax, it would leave untouched the unfairness inherent in the design of council tax.

And I haven’t even mentioned the very real political spectre of the impoverished elderly widow living in her expensive property that always arises whenever council tax reform is mentioned. Using such evocative images makes it easy for politicians to do nothing for fear of a public backlash.

Yet the uneasy alliance between government and local authorities on council tax freezes is unravelling, and not necessarily on straight party political grounds.

Doing nothing leaves the nearly two-thirds of people whose bills would fall by more than 10% under a progressive property tax still paying more; this at a time when a family of four has seen the amount they need to spend just to achieve a minimum acceptable standard of living increase by 25% in the last five years.

Now is the time to start thinking about a long-term replacement for council tax that would introduce a fairer balance of the tax burden between lower- and higher-value properties. This is not easy, but neither is it impossible. Suggesting a property revaluation is always immediately rebutted by the argument that it’s too politically difficult.

The Joseph Rowntree Foundation recently published evidence on the impact of moving to a progressive property tax. It was interesting when we ran a round-table debate on this issue that people in the room immediately started talking about how much easier it would be to simply revalue council tax and add some extra bands.

Perhaps it was a response to the news that a progressive property tax would reduce median bills for elderly single people by £180 and by £320 for elderly couples compared to council tax. Having looked at the impact of a revenue-neutral progressive property tax, it’s clear that redistributing the tax burden makes it possible for median bills to fall while the overall tax take remains the same.

Of course, someone has to pay more, so while the bills for the poorest tenth of households would fall by £202 with a progressive property tax, the richest tenth would pay £184 a year more.

Any replacement for council tax must stand the test of time. Any change must be gradual, carefully done and linked to ability to pay. It should also be linked to a wider debate on reform of local government finance. Change must also command political consensus, probably with a strong majority government to carry it through.

We’re not there yet, but I watch with interest for developments on London Mayor Boris Johnson’s recent comment that ‘we cannot go on forever without looking at our council tax valuations’.

The realist in me says nothing will happen during the next parliamentary term, but the optimist says that if we get the debate right now there might be hope post-2020.

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