Towards a Scottish Land and Building Transactions Tax

I had a day out in Edinburgh today. I was part of a panel assembled by the David Hume Institute talking to the Scottish Parliament’s Finance Committee about the economic implications of the Scotland Act (2012). The Act expands devolved powers in a number of important respects including giving Scotland’s Parliament powers over 10p of income tax at each tax rate, widening borrowing powers and devolving two taxes – on landfill and for Stamp Duty Land Tax (SDLT). The tax changes create many economic risks not least in terms of behavioural responses to any prospective tax changes (which in turn impact on revenues) and how to negotiate the spending block adjustment that follows (e.g. the Scottish spending block is adjusted downwards on a one-off basis to account for the fact that stamp duty will be raised in Scotland). Getting this right is clearly very important.

My focus was on the land and property transactions tax. The Scottish Government is developing a new tax to replace SDLT called the Land and Building Transactions Tax (LBTT). It is presently going through the legislative process and is different from SDLT in one key respect – it will not be a ‘slab’ tax but instead is ‘progressive’. What this means is that instead of paying the highest eligible tax rate on the entire property value, there is a marginal progression, as with income tax, so that you only pay the highest rate applicable on the portion of property value above the relevant threshold (and for much of that value it will be zero-rated). This would also tend to suggest that a revenue neutral LBTT will require higher marginal tax rates. There are likely to be three tax rates, a 0% for the first portion and then two higher rates. However, the Scottish Government will announce these rates nearer the time of the tax’s introduction (2015-16) – so we are presently a little in the dark on these key questions.

The standard discussion points about SDLT are as follows. First, UK property transaction taxes are relatively low (as recently borne out by an OECD study in 2011).  Second, the revenue from the tax is strongly pro-cyclical but is also correspondingly unstable (it is the product of the tax rate, the price of housing and the volume of transactions). Third, it is as we saw a slab tax and this encourages bunching of property prices just below tax rate thresholds. Fourth, as a transactions tax, it may discourage mobility (the recent Mirrlees Review argued for its abolition on these inefficiency grounds). Fifth, regional variations in house prices mean that the burden of the tax varies in local markets (note that according to Register of Scotland figures, at local authority level in Scotland average property values can vary from less than £100,000 to more than £230,000).  Sixth, at the individual level, the tax is counter-cyclical in that rising prices push properties in to higher tax brackets slowing market activity while falling prices move properties into lower tax brackets encouraging mobility (as discussed in the JRF Housing Market Task Force report written by Mark Stephens). Moreover, unless, the tax threshold rates are regularly revalued, this means that there will be an element of ‘fiscal drag’ – as prices rise, transactions will slowly shift into higher tax rates discouraging mobility. Finally, SDLT is one of very few policy clubs left to the policy maker to intervene in the housing market – and it has been extensively used as a temporary stimulus.

What does this imply for the proposed LBTT? While it does away with the slab characteristics of the SDLT, until we know about the tax rates and plans for their uprating (i.e. periodic revaluation) we cannot say whether it will be a more or less efficient tax on that score. The tax will still be clearly pro-cyclical in revenue terms. On this point it is interesting to note that the OBR have predicted increases in revenues from the SDLT in the years ahead, premised presumably on a general housing market recovery. This seems a little heroic to me. In its negotiations over the spending block adjustment, the Scottish Government would be surely correct to view cautiously future revenue growth from this source.

On the Mirrlees point, there is a basic trade-off between the economic loss of a transaction tax inhibiting commerce and the revenue security of a tax on immobile property. However, Mirrlees is also making a wider point that housing taxation should be normalized and be taxed on the flow of consumption services and investment returns similar to other activities and assets. This would entail a tax on the annual rental value of properties in place of SDLT and council tax, and an end to investment tax advantages. This has much to commend it, as does a land value tax – at least in theory. Such long-term goals are shared by many housing economists, myself included, but the political unpopularity of housing tax reform keeps it hidden in the long grass.

So, we need caution about the future level of LBTT revenue.  We need to think carefully about the tax rates still to be chosen for LBTT and about the necessity of their regular revaluation. I also hope that the new tax will not be an easy target for interventionist schemes but instead will be allowed to do its modest counter-cyclical work relatively unimpeded. It will not change the housing system in Scotland but it could do a little good rather than the opposite.

References

Mirrlees, J et al (2011) Mirrlees Review: Reforming the Tax System for the 21^st Century. IFS: London.

OECD (2011) ‘Housing and the Economy: Policies for Renovation’, in Economic Policy Reforms 2011 Going for Growth. OECD: Paris.

Stephens, M (2011) Tackling Housing Market Volatility in the UK. Joseph Rowntree Foundation: York.

Debasing Asset-based Welfare

After a short period submerged in the co-ordination of a research bid I have resurfaced. I did manage to get to the annual Housing Studies Association conference in York last week. I was struck how often one theme recurred: the increasing reliance on, and growing critical academic scrutiny of, the different possible policy uses of owner-occupied housing wealth.

It has been recognised since the Thatcher 1980s and the controversial work of people like Peter Saunders that the large-scale growth of home ownership in a context of long run rising real house prices – can deliver significant redistributions of wealth between households, over generations and across differently performing housing market regions. This means that how the lifetime wealth of a household is changed by long term home ownership (including their capacity to transfer it on to succeeding generations, or allow it to stand in for a pension and support consumption in later life) is the outcome of a relatively arbitrary set of occurrences.  It is about timing of purchase and disinvestment, about the location of your home, your family circumstances (e.g. the effect of divorce and household dissolution), the size of your pension and your constrained choices.

Even with more than 2 in 3 owning their homes, there is no guarantee of holding housing wealth, or being able to use it when you would need or want to. So, this is not a very promising basis for a wider policy of asset-based welfare, despite the more or less explicit support for it in some think tank and political quarters. To paraphrase John Hills during the Turner Pensions Commission, relying on homeowner housing wealth as a way of supporting pension income in older life is arbitrary and ad hoc; it is no alternative to a comprehensive pension policy. So, and despite all those non-home owners (including those who do not have help meeting large deposits from housing-rich parents and grandparents), this is not a sustainable cheap solution in the age of austerity.

What was so interesting at the HSA conference was the different ways these ideas are starting to unravel. First, we have at best only an imperfect idea of housing wealth transfer empirically,what the drivers are and  how it has been used over time? We do not know how older households at the margin make decisions about the division and timing of their housing assets, what constraints they face and what policy levers might influence them.

Second, the housing asset-based welfare option actually reflects long term inter-generational consequences of maintaining the privileged tax status of one investment class in a context of unresponsive housing supply and hence volatile (though trending upwards) house prices.

Third, and relating to another big policy controversy, there was an interesting paper on East Asia by my colleague Richard Ronald. Richard pointed to an interesting policy development in Japan – elderly home owners seeking to downsize enter into an agreement with a state agency, wherein they vacate their home and move to a smaller property receiving an annuity and allowing a larger family into their former (larger) home. All the more interesting when set against the UK bedroom tax and the wider interest in under-occupation.

All in all, it should be made clear that past housing equity gains, which can only be transferred once, are a poor basis for remaking the welfare state in the 21^st century. It may be superficially attractive for the reasons alluded to earlier, but it is highly unevenly spread, arbitrary and capricious in its generosity, and highly uncertain going forward.  Tony O’Sullivan and I argued in a paper last year that there is scarcely any macroeconomic argument for preferentially treating home ownership, and that the limited positive microeconomic arguments to do with parenting and education benefits are clearly targeted ones rather than general to all. To these arguments we should add skepticism about whether home ownership in its current setting could ever be a viable asset-based welfare social policy instrument.

Taxing Bedrooms and the Cult of Un-Evidence

There were co-ordinated protests around Britain last weekend demonstrating against the introduction of the under-occupation charge, widely known as the ‘bedroom tax’. The media have picked up on the issue and no longer is it only the housing professions, anti-poverty and welfare rights groups beating the drum. However, as Alex Marsh (1) pointed out recently, the new-found interest in housing benefit has come too late to prevent the likely chaos the ‘reforms’ will engender.

For anyone left who missed the controversy, the reforms will reduce the housing benefit received by working age social tenants by 14% if they under-occupy one room and by 25% if they have two or more ‘excess’ rooms.

The DWP do not like it being called a bedroom tax but Richard Best, who popularized the term, argued that it is like a tax because most people who find themselves under-occupying cannot readily downsize because of the general lack of smaller sized units. Bigger properties reflect a long-term strategy across the sector (and housing system more generally) to get rid of one bedroom properties and indeed commonly to promote the use of a spare room in housing allocations for many years).

The cut to HB is hardly voluntary and is just what it looks like: an austerity tax on the poor. And when those who are able to move downsize into the rental market, their rents and housing benefit bills are probably going to be considerably higher than if they had stayed in larger social rented housing.

There has been comparison made with the politics of the poll tax, particularly in terms of resistance and potential damage to the government. I am not so sure – the benefit reforms remain the politically popular part of the austerity programme (for now, at least – it may be a bit different if the introduction of the universal credit is as difficult as many imagine it will be).

Two politicians today illustrated the ‘quality’ of the debate. The Chancellor of the Exchequer extended the ‘deserving versus undeserving poor’ dualism, to imply that, ‘generous’ state benefits were linked  to a notorious recent multiple murder. David Davis claimed that one in two out of hundred children born to benefit-dependent families came into the world for the additional benefit income they provide for their parents.

Stop and think about these statements for a minute. How do they know these contentions to be facts? On what empirical basis could such a thing be stated and known? To me this is the nadir of the reaction against evidence in policy. Yes, there are all sorts of problems with evidence-based policy, which can be guilty of many abuses and misuses. But the continued development of policy and policy platforms on a basis of positively rejecting evidence and relying on belief, anecdote and frankly faulty and wrong-headed analysis is profoundly depressing. We have reached the stage where single cases or indeed theoretical cases of maximum benefit income that could be earned are being treated as benchmarks in debates rather than as the extremes and end of spectrum cases that they clearly are. Worst of all, hardly anyone questions this anymore.

At the same tine, there is, of course, evidence. Colleagues of mine in Glasgow contributed to the latest Breadline Britain study that has in many respects confirmed the common sense view that inequality and material poverty is worsening (in an already highly unequal pre-austere UK society). The study leader, Dave Gordon from the University of Bristol, was quoted in the study press release as saying the results painted a bleak portrait. One in three people in the UK endure ‘significant difficulties’ and one in four have an ‘unacceptably low standard of living’.  The study team argues that things will only get worse as benefits fall cumulatively in real terms. (2)

The benefits system is of course critical to the daily management of poverty for millions of people. Housing benefit in particular is also an in-work benefit. Working low-income households rely on it. In an era of economic stagnation and considerable reliance on low paid work – these under-occupation charges are inherently non-marginal and will undoubtedly contribute to disincentivising work. That can’t be right?

(1) www.alexsarchives.org

(2) http://www.poverty.ac.uk