More Discussion of Reforming Property Taxation

by Ken Gibb

Fresh from a recent post on land value taxation I am writing on this subject again, this time in response to my colleagues at Heriot Watt who have just published a report for the Joseph Rowntree Foundation (After the Council Tax: Impacts of Property Tax Reform on Places, People and House Prices by Glen Bramley, Chris Leishman, Mark Stephens, David Watkins and Gillian Young). Their report critiques the current council tax, runs  comparative analysis of a revalued council tax and contrasts it further with a flat rate percentage tax on property values (similar to current arrangements in Northern Ireland). They also discuss a policy trajectory to move from the council tax to a better local property tax and ultimately to a national tax on property, one that looks a bit like Schedule A imputed income tax and also the excess returns tax proposed in the Mirlees Review.

What is the critique of the council tax? This is well known ground but in essence the tax is a higher proportionate burden on cheaper properties than on more expensive ones. Second, it has not been revalued since 1991 and is hopelessly out of date both regionally and within local housing markets. Third, we now have something like a third of all tax units (households) benefiting from the single adult discount. Fourth, there is the insidious effects of long term council tax freeze and now also the localising of council tax reduction.

What are the authors’ empirical findings? First, a shift to a flat rate property tax (or indeed a progressive one) would shift the tax burden toward high value London and the South East. The authors deem this redistribution so large that it would require to be phased-in or damped. Second, the flat rate percentage property tax would be progressive with respect to the burden on different income groups with considerable benefit aimed at lower income groups. Middle income groups would also see a reduction in their liability in general. The authors argue that for those who do lose out in the low to middle income brackets it would be possible to compensate them with savings made from reduced rebate bills. Fourth, the authors argue that a property tax is generally not deemed to be fair and that some form of income tax would be required, preferably embedded in a hybrid property and income tax structure. Finally, they report econometric results that suggest reforming property tax could make a modest but statistically significant contribution to moderating house price volatility.

How would they implement tax reform and overcome obstacles? These are in many respects the key questions. First, the authors suggest a cap on London property taxes as part of the transition and consider ways to help low-income losers from the tax change in that part of the country. They also consider the Housing Market Task Force to transition the local property tax to a national tax based ultimately on the old Schedule A imputed rental income tax.

What do I think? The purist response would be to go for a land value tax and to rehearse the argument of my recent post and that might lead one to support the comprehensive Mirlees review position on the tax on excess returns (a variant of Schedule A). But if we were to start from the present position and work towards something coherent and possibly enduring what needs to be done? First I would revert to a national system of council tax benefit – I don’t accept either the localism argument for it or the idea that it allows a lower Universal Credit taper (it patently does not if we consider the total taper facing low income working age households). Second, I would legislate for 3-4 yearly automatic revaluation of property. It is one thing to bring the council tax data base up to date – it needs to be done regularly and consistently, forever more that there is such a tax.

That is the easy bit(!). I think we then need to consider what kind of local taxation we want and what kind of general taxation on housing/property. Locally, I was always taken by the idea of having multiple local taxes (i.e. two) – a property tax (like the Northern Ireland one) associated with paying for amenity or facility services that are fundamentally local and a local income tax related to national redistribute services that are delivered locally like education (as was suggested in a report Alternatives to the Community Charge written for the JRF more than 20 years ago by a number of experts including Tony Travers). Nationally, we are back into the territory of tenure and tax neutrality and the Mirlees Review – but the point is to develop taxes that do not favour owner occupied housing per se and do not do inefficient things like tax at the point of transaction. These are bigger questions than for this post.

The big difficulty in all this is persuading those that need to be convinced that we should on efficiency and fairness grounds unpick the council tax. We need to develop a political consensus around reform and one that has a place for a sensible property taxation and try to make revaluation normal and boring instead of completely beyond the pale. Any reform programme would need to be one with a lengthy transition and protection period for losers and would thus need bipartisan support. While I do not minimise the difficulty of achieving this – it can be done as phasing out mortgage interest tax relief showed. But first we must convince the men and women from the Ministry that the council tax is so bad and that the problems it is creating for local government and the housing market – do indeed require us to invest treasure and time to try and fix it on a long term basis.

Unfortunately, this is one of those rare policy questions where the infamous previous experience of a botched and cataclysmic attempt to reform local government finance brought down a prime minister and is simply an area where it is incredibly difficult to build any sort of institutional commitment to reform. The report by Glen Bramley and colleagues is both thought-provoking and a welcome effort to move this debate forward thereby staking a claim for a more humane and workable form of housing taxation and local government finance.