Will the Council Tax Freeze become a Plague on all our Houses?

by Ken Gibb

A few things have come together to lead to this post. In recent days there has been a party political fight in Scotland over a challenge made by Labour regarding the long-standing council tax freeze in Scotland. Arthur Midwinter, a well-known local government expert, weighed in against the consequences of the cumulative effects of the freeze. At the same time the Scottish Government dismissed the criticism on the basis of the apparent high popularity among the electorate regarding the continuing freeze to the tax.

As this was going on I was preparing a class on local government finance and this led me to look a bit more closely at the data and to reflect more widely on local taxation, the freeze and the future of property taxes.

We have had a freeze on the council tax since 2007-08 in Scotland. Ironically, it was pointed out to me today that the idea arose in Scotland from Glasgow city council during the Purcell regime and was subsequently taken up by the SNP minority government thereafter. The Scottish councils and the Government agreed a Concordat that protected the share of total Government spending allocated to councils and allowed them to have unrestricted access to a series of previously ring-fenced policy areas. As Arthur Midwinter pointed out, however, falling total spending has to be met by councils in proportion to their share, as well as paying for the cost of the freeze in council tax and making efficiency savings. This, he concludes, translates into deep job and service cuts. Moreover, Midwinter contends that the specific ending of ring-fenced programmes is essentially anti-poverty in its effects on things like the Supporting People Fund, the Fairer Scotland Fund and the Community Regeneration Fund.

While much has been made of this choice to remove the ring-fencing of these sorts of programmes, less has been made of Midwinter’s other key point – that freezing the council tax is regressive in the sense that higher band properties, generally occupied by higher income households, receive more financial benefit from the freeze than low income households in low banded properties. Moreover, those who receive council tax benefit get no financial gain from the freeze. These distributional effects are cumulative.

At a broader level there is a damaging long term consequence – households get the benefit of falling real terms council tax payments but elected councils lose their ability to set tax rates and be accountable for their mix of services. Instead income sources funding revenue expenditure are essentially removed from any local control or even influence (other than growing the tax base through land release and construction).

Are we content that this difficult to reverse dismantling of local taxation should continue?

People may rightly dislike aspects of the council tax: it has pretty major problems. The flat bands mean those in the top band only pay twice the band D rate even those the price of the property may be twenty, thirty or more time more expensive.  The tax base is valued at 1991 prices and there is no general revaluation (a necessary condition of any reasonable property tax). The council tax was a quick fix in the early 1990s to get the then Government distanced from the poll tax – but it should not have then been fixed in stone. It should have ben reformed, modernized and revalued – but even so, its failings do not warrant the ending of local discretion over local taxation.

The English are of course now embarking on a council tax freeze though the main difference there is the Localism-inspired dismantling of a national system of council tax benefit.

The big point for me, especially if one fundamentally believes in a system of local government that has financial responsibility for tax-raising on democratic grounds, is that reform of local government has to be comprehensive and fix finance, the functions and the geography of local government at one and the same time. Previous failings reforming local government from the top-down have too often failed because they re-jigged one side of the Rubik’s cube without fixing all of it.

If we go back to the venerable Layfield Commission in the 1970s, still the best of its kind, it said there were fundamental choices to be made between a centralising versus a localizing empowering approach. In addition they made the important point that we do not necessarily require one local tax but could in principle use several to raise the same revenue in total.

Later in the early 1990s, the Joseph Rowntree Foundation published a report (Alternatives to the Community Charge, 1991) that argued that funding mechanisms should be linked to service type so that national redistributive or needs based services delivered locally should be paid out of government grants but local amenity and facility services should be funded by local taxes and that this could readily involve local property and income taxes. However, any taxes proposed should be feasible (e.g. regular revaluations), fair in an affordability capacity to pay sense, should promote local accountability and be consistent with wider economic and policy goals.

As earlier posts will have made clear, I think we do need to tax property and that local taxes which reflect the benefits to property values of local services does not seem unreasonable. This may be a tax on capital values like in Northern Ireland or something more like a land value tax.

While not underestimating the populism angle, it has to be recognised that the current road may lead to a much weaker system of local government. If that is not what one wants, then it is time to consider a broader set of reforms of finance. And that is before we even think about non-domestic rates. The short run fix needs to be debated in terms of its long-term consequences and the viable alternatives that might be presented.